On 16 March, the Federal Reserve hiked the fed funds rate by 25bp, to 0.25-0.50%, the first rate hike in four years. The Fed decision was widely expected and probably the most telegraphed rate hike in recent memory. However, the meeting’s statement and accompanying SEP offered some hawkish surprises.
The FOMC statement signaled that yesterday’s rate hike was the start of a series of rises in coming meetings, a clear departure from the gradual tightening cycle of 2015-18. While the Fed flagged concerns about the effects of the Russia-Ukraine war on the US economy, this was not sufficient to overcome their larger concern about inflation. Within the SEP, the median rate for the fed funds rate by year-end 2024 increased from 2.125% to 2.750%, well above the Fed’s estimate of the terminal rate (2.400%) and indicative of the Fed’s willingness to take the policy rate into “restrictive territory”.
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