The Weekly Wire: Is the Fed Finished?

Last week the Federal Reserve raised the Fed Funds Rate by 25 bps, to a range of 4.75% on the lower end and 5.0% on the upper end, the ninth interest rate increase of the current rate hiking cycle, and an increase that took the Fed Fund’s Rate to its highest level since 2007. Despite the market volatility of late, there wasn’t that much doubt going into the March meeting as to where the Fed Fund’s Rate would land coming out of the March meeting.

The same really can’t be said about the path forward for monetary policy, at least as of today; based on the latest Summary of Economic Projections – often referred to as the Fed’s Dot Plot – our central bank is expecting one more rate hike this cycle, taking the Fed Fund’s Rate to a terminal level of 5.0% to 5.25%. That said, the Fed has also acknowledged that the travails of the banking system – here at home and increasingly, it seems, in Europe – have created tremendous uncertainty for the financial system specifically and the real economy generally. Said differently, the Fed thinks it needs to raise rates by another 25bps, but it’s really not so sure it should. And further reflecting the uncertainty around the path forward for monetary policy, Wall Street, at least as of today, doesn’t see the Fed raising rates again this cycle, pricing in no change to the Fed Funds Rate at the bank’s May meeting and pricing in a 25 bps rate cut at the bank’s June meeting.

The Fed has an unenviable job – trying to solve for price stability and full employment for the world’s largest and most important economy with every decision it makes second-guessed on Wall Street, in Washington, DC, and in financial centers and political capitals around the globe. For our money, we think the Fed has likely done enough on the rate hiking front and we would be surprised if the next move for the Fed Funds Rate was higher and not lower.