Fed Raises Rates by Quarter Point, Signals Pause in Hiking Cycle

FED DECISION KEY POINTS:

• The Fed votes to raise its benchmark rate by 25 basis points to a range of 5.00% to 5.25%, a move broadly consistent with market expectations
• The decision to push ahead with another hike is part of the efforts to restore price stability, with inflation well above the central bank’s 2.0% target
• The FOMC guidance signals a pause in the tightening cycle

Most Read: Oil Prices in Tailspin as Economic Risks Darken Demand Outlook, Bears in Control

MARKET REACTION

Updated at 2:30 pm ET

Immediately after the FOMC announcement crossed the wires, the U.S. dollar, as measured by the DXY index, deepened session losses, while S&P 500 futures extended gains, with traders welcoming the Fed’s move to flag a potential pause in the tightening campaign.

US DOLLAR INDEX & S&P 500 5-MINUTES CHART

Source: TradingView

Original article published at 2:10 pm ET

The Federal Reserve today concluded one of its most anticipated meetings in recent times and voted unanimously to increase its benchmark interest rates by 25 basis points to a range of 5.00% to 5.25%, the highest band and thus the most restrictive policy stance since 2007.

The Fed’s decision to press ahead with another hike was broadly expected leading up to Wednesday’s announcement and is part of the central bank’s aggressive efforts to restore price stability in the economy, with headline inflation sitting at 5.0% in March, well above the long-term 2.0% target.

FED DECISION AT A GLANCE

Source: DailyFX Economic Calendar

In the policy statement, the bank took a downbeat tone on growth, noting economic activity expanded at a modest pace in the first quarter, but countered those pessimistic comments with more positive ones about the labor market, emphasizing that job gains have been robust.

In terms of the consumer price outlook, policymakers indicated that inflation continues to be elevated and that the committee remains highly attentive to inflation risks. It was also underscored that recent developments tied to the banking sector crisis could weigh on economic activity, hiring and inflation.

On monetary policy, the FOMC adjusted its guidance to signal a pause in the hiking campaign, substituting language that “some additional policy firming may be appropriate” for “in determining the extent to which additional policy firming may be appropriate” the bank will take into account the cumulative tightening of monetary policy.

The revised guidance suggests the Fed will stay on hold at upcoming meetings, but will retain a data-dependency approach, keeping its options open should further tightening be warranted in the future due to unforeseen circumstances. In any case, the May message is clearly more dovish than the one conveyed in March. This should be bearish for the U.S. dollar in the near term.