The Fed raised interest rates by 25 basis points as expected, suggesting that the tightening cycle is nearing its end

At 2 a.m. Eastern Time on Thursday, the Federal Open Market Committee (FOMC) of the Federal Reserve released its latest interest rate decision. In line with market expectations, the target range of the federal funds rate was raised by 25 basis points to between 4.75% and 5.00%, the highest level since September 2007.

This is the bank's ninth consecutive rate hike since March last year, with a total rate hike of 475 basis points. In addition, the Fed also raised the reserve balance rate from 4.65% to 4.90%, also by 25 basis points.

Under the pressure of the banking crisis, the Federal Reserve had to slow down the pace of interest rate hikes. Just two weeks ago, Federal Reserve Chairman Powell said that the Federal Reserve might not only speed up the pace of interest rate hikes, but the terminal interest rate might also be higher than previously expected. However, the situation is stronger than people, and concerns about the banking system have disrupted the Federal Reserve's plans.

The members unanimously agreed on the interest rate decision. It is worth noting that the phrase "continued interest rate hikes are appropriate" has been deleted. Instead, "some additional policy tightening" may be appropriate, which means that there is a possibility of another 25 basis point interest rate hike at the next meeting, but it also implies that the interest rate hike cycle is nearing its end.

Although the FOMC wrote in its statement that the U.S. banking system remains strong and resilient, it also noted that recent pressures on the banking sector could lead to a tighter credit environment for households and businesses and put pressure on economic activity, employment, and inflation.

The new statement removed the wording that inflation "has eased". The Fed believes that inflation is still high and consumption and production growth are moderate, so further tightening of policy may be appropriate.

In terms of economic expectations, the Federal Reserve lowered its forecast for US GDP growth in 2023 to 0.4%, compared with the expected growth of 0.5% in December last year; at the same time, the Federal Reserve further raised its inflation forecast for the United States this year, and expected PCE inflation to be 3.3% in 2023, compared with 3.1% in December last year; the unemployment rate is expected to be 4.5% this year, slightly lower than the 4.6% expected in December last year.

The median of the Fed's dot plot shows that the median interest rate expectations for the end of 2023 and 2024 are 5.1% and 4.3%, respectively. Of the 18 officials attending the meeting, 17 expected the federal funds rate to rise to at least 5.1% by the end of this year, which means that the interest rate will rise by another 25 basis points.

After the resolution was announced, the three major U.S. stock indices rose in the short term, with the Dow Jones Industrial Average up 0.2%, the Nasdaq up 0.6%, and the S&P 500 up 0.4%; the short-term gains of spot gold expanded to more than $20, currently trading at $1,965.56 an ounce.

Nick Timiraos, the "Fed mouthpiece", commented that the Fed raised interest rates by another 25 basis points, but hinted that turmoil in the banking system may end its rate hike action earlier than expected two weeks ago.

Timiraos added that Fed officials hinted in their post-meeting policy statement that they may soon stop raising interest rates. The committee expects that some additional policy tightening may be appropriate. They dropped language used in the previous eight statements that the committee expects "continued rate hikes" will be appropriate.

Paul Nolte, senior wealth advisor and market strategist at Murphy & Sylvest Wealth Management in Chicago, said they are still talking about raising interest rates and are not saying they are going to end here, but the market sees this as a fairly dovish statement. "They acknowledged that there are problems in the banking industry, but they said, well, the banking industry is quite healthy, don't worry, which is exactly what I expected." "They haven't given up on raising interest rates, but both the stock market and the bond market see this as a huge positive."