By Chuck Mikolajczak

NEW YORK (Reuters) – The Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point, but indicated it was on the verge of pausing further increases in borrowing costs amid recent turmoil in financial markets spurred by the collapse of two U.S. banks.

The move set the U.S. central bank’s benchmark overnight interest rate in the 4.75%-5.00% range, with updated projections showing 10 of 18 Fed policymakers still expect rates to rise another quarter of a percentage point by the end of this year, the same endpoint seen in the December projections.

But in a key shift driven by the sudden failures this month of Silicon Valley Bank (SVB) and Signature Bank, the Fed’s latest policy statement no longer says that “ongoing increases” in rates will likely be appropriate. Instead, the policy-setting Federal Open Market Committee said only that “some additional policy firming may be appropriate,” leaving open the chance that one more quarter-of-a-percentage-point rate increase would represent at least an initial stopping point for the rate hikes.

STORY:

MARKET REACTION:

STOCKS: The S&P 500 turned 0.29% higher

BONDS: Benchmark 10-year note yields fell to 3.5223% after the decision; The 2-year note yield fell to 4.033%

FOREX: The euro extended a gain and was last up 0.71% at $1.0844

COMMENTS:

TOM MARTIN, SENIOR PORTFOLIO MANAGER, GLOBALT INVESTMENTS, ATLANTA

“The Fed’s 25 basis point increase was in line with expectations and runs the line between too much raising and too much indication of a pause.”

“You’re not seeing a whole lot of movement in interest rates or in the stock market of any consequence, so it looks as though they kind of hit it right down the middle.”

“They still gave a nod in the direction of continued further rate increases, plus they increased their inflation rate expectation. And so that gives them some cover for some additional raising whether they say so or not.”

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

    “They raised by 25 basis points, and basically it’s a dovish statement. They hinted that they’re getting very close to the end of their tightening cycle. I was looking for a pause. That didn’t happen, but it was basically what the market was looking for. As you can see, the markets (stocks) are a little bit higher, the dollar is falling out of bed and yields are actually moving lower. And it does now appear that the bond market is suggesting the Fed is likely to cut rates one or two times later in the year.”

RANDY FREDERICK, MANAGING DIRECTOR, TRADING AND DERIVATIVES, CHARLES SCHWAB, AUSTIN, TEXAS

“It is a nice positive move and that is pretty much because the Fed delivered what everyone expected which was a quarter-point, that was the odds-on favorite from just about everybody. The telltale here is going to be the next two hours, because that is when the market gets pretty volatile. The market was sort of quiet going into this, kind of like what everyone expected, so we just have to kind of wait and see what (Fed Chair Jerome Powell) says over the next hour.

“He is going to do everything he possibly can to calm people down, to tell them everything is fine, you have nothing to worry about. That’s the last thing he wants to do is create some more market volatility. Their implicit guarantee of all deposits which (Treasury Secretary Janet) Yellen talked about yesterday and the day before is a big part of that. I think he is going to get questions about ‘well are you going to raise the FDIC to a million?’ and he is just going to basically dance around all those questions but for the most part he is just going to try and get everybody to remain calm.”

MONA MAHAJAN, SENIOR INVESTMENT STRATEGIST, EDWARD JONES, NEW YORK

    “It does seem like it was largely as expected by the markets. What was interesting for us is that when you look at some of their economic projections, they are keeping inflation steady and even slightly higher on core inflation for 2024 and 2023, but their median dot plot for this year hasn’t changed… we’ve seen no change in the median dots despite inflation remaining elevated according to Fed projections. So, partly at least, the recent banking turmoil has weighed on their decision.”

    “Generally I’d say, based on the market reaction, markets are feeling a little bit of relief by this statement… It may be some indication that the peak rate is not moving higher than expected. We’ll be listening to the conference for what they say about the crisis and what they’re thinking about managing it.”

MATTHEW MISKIN, CO-CHIEF INVESTMENT STRATEGIST, JOHN HANCOCK INVESTMENT MANAGEMENT, BOSTON

“I think it’s relatively hawkish given everything that’s happened the last couple of weeks. Standing by the rate hike and then in the Summary of Economic Projections saying that they’re going to be not cutting throughout the whole course of 2023, suggests they’re trying to hold the higher for longer in terms of interest rates.”

“They’re siding with the inflation risk over the systematic risk at this meeting, based on the dot plot at least.”

BRIAN JACOBSEN, SENIOR INVESTMENT STRATEGIST, ALLSPRING GLOBAL INVESTMENTS, MENOMONEE FALLS, WISCONSIN

“The Fed is probably thinking financial stresses are substituting for future rate increases. That’s why they no longer think ‘ongoing increases’ are necessary, though ‘policy firming’ may be appropriate. The Fed is now living on a hope and a prayer that they haven’t done irreparable harm to the banking system.”

SAM STOVALL, CHIEF INVESTMENT STRATEGIST, CFRA RESEARCH, NEW YORK

“We’re seeing a pop after the statement and the action by Fed, but I think we still have to wait to hear what Fed Chair Powell will say and if, in any regard, he walks back the positive implication of his statements.”

“Investors are just taking some profits (in banks) because it’s still so uncertain with the regional banks. But I would say that I expect them to continue to recover over the next several days.”

“We expect Powell to talk about the need to remain firm against inflation, but at the same time be cognizant of the challenges taking place in the banking community and remind investors that the Fed will be there to offer liquidity if need be.”

KARL SCHAMOTTA, CHIEF MARKET STRATEGIST, CORPAY, TORONTO:

“I think the Fed did take the path of least resistance here, hiking but also providing a relatively dovish outlook on rates over the year ahead. That essentially gives markets what they were looking for.”

“I think the clear, big sentence in the statement itself, that was sort of interesting here was, ‘Recent developments are likely to result in tighter credit conditions for households and businesses, and to weigh on economic activity, hiring and inflation.’ And so what this suggests is that to some extent, the turmoil in the banking sector that has unfolded in recent weeks is actually helping the Fed achieve its objectives of loosening slack in the in the US economy and cooling aggregate demand.”

TIM GHRISKEY, SENIOR PORTFOLIO STRATEGIST, INGALLS & SNYDER, NEW YORK

“The Fed has been spooked by Silicon Valley Bank and other banking turmoil. They certainly point to that as a potential depressant on inflation, perhaps helping them do their job without having to raise rates as aggressively.”

“This positive reaction from the market is what you’d expect with a softened tone from the Fed and allowing the banking system setbacks to do their job for them in reducing inflation.”

PAUL NOLTE, SENIOR WEALTH ADVISOR AND MARKET STRATEGIST, MURPHY & SYLVEST WEALTH MANAGEMENT, CHICAGO

“They still are talking about hiking rates. They are not talking about being done here, but the markets are taking it as a pretty dovish statement.”

“They acknowledge the issues with the banking sector, but said, alright they are pretty healthy, not to worry, which is what I would have expected.”

“They haven’t backed away from hiking rates, but the equity markets, and the bond market too, are taking it as a huge positive.”

ASHISH SHAH, CHIEF INVESTMENT OFFICER, GOLDMAN SACHS’ PUBLIC INVESTING BUSINESS, NEW YORK

“Despite the Fed pressing ahead with a 25bps rate hike today, we see considerable uncertainty in the path ahead and would downplay the significance of updated economic and dot plot projections in such a fast-moving environment. 

“Going forward, we expect the Fed’s data-dependent framework to be informed by what happens in both the economy and banking sector. It is easier to separate monetary policy from financial stability objectives during liquidity crises but concerns over capital constraints can fast change the economic outlook and blur the divide. Rate cuts have become more conceivable, though not yet our base case given the inflation picture.

“It is difficult to pinpoint where and when further vulnerabilities may unfold, but we think areas that benefited the most from low rates and low inflation may be the most exposed. Big picture, as markets adapt to a higher rate regime, we continue to favor high quality fixed income.

(This story has been corrected to fix spelling of Ashish Shah)

(Compiled by the Global Finance & Markets Breaking News team)

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