On Wednesday the Federal Reserve raised interest rates for the ninth time in a row since March 2022, choosing to continue its fight against high inflation despite stress in the banking sector, following the recent collapse of two regional banks.

The Federal Reserve delivered a 25-basis point interest rate increase, but it took a more cautious stance about further increases. The Fed indicated that rate hikes are approaching an end and noted that future increases will depend largely on incoming data. The fed funds rate is seen reaching 5.1% this year, 4.3% by the end of 2024 and falling to 3.1% in 2025.

Source: Trading Economics

The Fed noted the U.S. banking system is sound and recent developments are likely to result in tighter credit conditions for households and businesses and also weigh on economic activity, inflation and hiring.

Fed Chair Jerome Powell signalled that the fight against inflation isn’t over, but “ongoing” rate hikes was removed from the statement and was replaced with “additional policy firming may be appropriate”. The subtle changes have a lot of implied meaning and was perceived as more dovish, leading investors to believe that the Fed might only hike once more.

Members of the Federal Open Market Committee are of the view that slightly higher rates may be necessary to combat inflation. Policymakers anticipate rates to climb by another 25-basis point by the end of 2023, according to the new projections released on Wednesday. They anticipate that some additional policy firming may be appropriate in order for monetary policy to be sufficiently restrictive to bring inflation to the Fed’s 2% target over time.

Some major investment banks were calling the central bank would pause its rate hikes, at least temporarily, in order to calm the stress from the collapse of Silicone Valley Bank and Signature Bank earlier in the month. However, Treasury Secretary Janet Yellen said that large withdrawals from the regional banks have stabilised in recent days and pushed back against suggestions of a blanket insurance of all U.S. banking deposits. This unnerved investors as few of them believe the banking stress has fully dissipated and how it would impact lending and the economy.

The U.S. central bank also cut its median forecast for real GDP growth this year to 0.4% from 0.5%, suggesting the banking crisis was already having an impact on economic activity, albeit limited at the moment.

The Fed Chair said that inflation is likely to decline gradually throughout 2023 and 2024 and while future interest rates are uncertain at the moment, rate cuts are unlikely this year. Mr Powell also said that while the Fed has made some progress on bringing down inflation, there’s still a long way to go and the way to the Fed’s 2% target may be “bumpy”.

Source: TradingView

U.S. equity indices whipsaw during the statement and the subsequent press conference but finished the session sharply lower. Investors were hoping the Fed would stop hiking as worries that the battle against inflation could lead to a recession were reinforced by the recent stress in the financial sector.

Treasury Secretary Janet Yellen exacerbated the selloff with remarks that the Federal Deposit Insurance Corporation (FDIC) is not considering or have discussed “blanket Insurance” for all U.S. bank deposits without approval by Congress.

The weekly RSI indicator remains below 60% since January 2022 suggesting that the stock market has been and remains in a bear trend since then. The daily RSI indicator is below the bear market resistance of 60% too and remains there at present. The first encouraging sign for the bulls at this juncture in time would be a sustained RSI break above 70% or the index clearing its key resistance of 4,325.

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