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The Federal Reserve raised interest rates by a quarter percentage point on Wednesday as it attempts to fight stubbornly high inflation while addressing risks to financial stability.

Investors and economists had widely anticipated the quarter-point increase despite the recent meltdown in the banking sector.

Still, Federal Reserve Chair Jerome Powell and policymakers entered their second policymaking meeting of the year confronted by an unusual level of uncertainty as the landscape surrounding the financial system continues to shift.

So what did we learn from the policy decision, economic projections and Powell’s press conference on Wednesday?

Here are our five largest takeaways.

1. No “pivot” coming this year

Investors are currently betting that the Fed will cut rates before the end of the year, with interest rates ending 2023 somewhere between a half point and three-quarters of a point lower than where they are now (a range of 4.75% to 5%). But investors are wrong, said Powell at his press conference on Wednesday.

Powell said that the central bank anticipates growth will slow and inflation will decline gradually this year and next year. “In that most likely case, if that happens, participants don’t see rate cuts this year,” he said.

While the Fed is data dependent and future changes to interest rates are “uncertain,” he said, a cut to interest rates this year is not in the central bank’s “baseline expectation.”

2. But maybe a pause

Policymakers in their statement on Wednesday got rid of prior language that forecast “ongoing increases” to the interest rate and instead wrote that the committee “anticipates that some additional policy firming may be appropriate.”

This is a case of classic Fed speak, where small changes to language have a lot of implied meaning. Powell urged investors at his press conference to focus less on “policy firming” and more on “some” and “may.”

So what does that mean?

Before the banking crisis, the Fed was fairly certain that more rate hikes would be coming in the future. Now, they may push the pause button.

Still, hitting pause on rate hikes is not the same as hitting stop altogether. Powell said on Wednesday that while the Fed has made some progress on bringing down inflation, there’s still a long way to go.

“The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy,” he said.

The Fed will be assessing data and the impact of its rate hikes in deciding how to proceed with policy, he said. “Inflation has moderated somewhat since the middle of last year, but the strength of these recent readings indicates that inflation pressures continue to run high,” Powell said.

3. More banking regulation is needed

While Powell repeatedly made assurances that the US banking system was sound and resilient, he did say that management at Silicon Valley Bank “failed badly,” and exposed its customers to “significant liquidity risk and interest rate risk.”

“My only interest is that we identify what went wrong here,” he said, adding that there needs to be stronger supervision and regulation in order to prevent more bank collapses and runs.

But Powell said the Fed wouldn’t jump to conclusions, adding that it would be “inappropriate for me at this stage to offer my views on what the answers might be.”

4. But the banking crisis may help bring down inflation

Wednesday’s Before the Bell focused on how the recent banking meltdown may have done some of the Fed’s work for it. Powell seemed to agree with that notion during his press conference.

The banking crunch is “likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes,” he said. Still, “it’s too soon to tell how monetary policy should respond.”

Fears of a bank run cause lenders to take fewer risks with their capital reserves to ensure they have enough cash to cover any potential withdrawal requests. That means banks may stop lending money to some borrowers, prevent some businesses from getting loans and issue fewer mortgages. It also means the economy would cool and potentially lead to layoffs and a housing market slowdown.

The Fed, in its fight against inflation, has been trying to do exactly that: Slow the economy. So rate hikes may not be necessary anymore to beat back rising prices.

On the other hand, the banking meltdown may not slow the economy. Powell said the Fed is watching closely.

“It’s possible that these events will turn out to have very modest effects on the economy, in which case inflation will continue to be strong, in which case, you know, the path might look different,” Powell said.

“It’s also possible that this potential tightening will contribute significant tightening in credit conditions over time. And in principle, that means that monetary policy may have less work to do. We simply don’t know.”

5. Job losses are a risk Powell is willing to take

The Federal Reserve expects unemployment to rise as it cools the economy in an attempt to bring down inflation.

By the Fed’s own prediction, the unemployment rate will rise to 4.5% by the end of the year, up from 3.6% last month. That could translate to more than 1 million more Americans out of work by the end of 2023.

Powell said that’s an uncertain but acceptable outcome: “We have to bring inflation down to 2%,” he told me in response to a question I asked Wednesday about the risk of snowballing unemployment. “There are real costs to bring it down to 2%. But the costs of failing are much higher.”

“If the central bank doesn’t get inflation back in place … you can have a long series of years where inflation is high and volatile. And it’s hard to invest capital. It’s hard for an economy to perform well. And we’re looking to avoid that,” Powell said.

As Powell spoke, US Treasury Secretary Janet Yellen spooked markets on Wednesday about the possibility of future bank runs as she gave testimony at a Senate hearing on Financial Services and General Government.

Yellen told lawmakers that federal bank regulators have not discussed any plans to insure all US bank deposits. There have been calls for a larger guarantee of deposits following the banking turmoil over the past two weeks, and Powell said Wednesday that “all depositors’ savings are safe.”

“I have not considered or discussed anything having to do with blanket insurance or guarantees of all deposits,” said Yellen.

Yellen called the rapid collapse of Silicon Valley Bank a “new phenomenon,” and said that the circumstances that led to its meltdown could happen again.

“The Silicon Valley Bank situation showed an overwhelmingly rapid run on a bank. We’ve never seen deposits flee at this rate,” she said. “Now in the world that we live in, although this was a small community and a disproportionate share of Silicon Valley Bank deposits, this kind of thing may more readily happen.”

Yellen, like Fed chair Powell, said that regulation and monitoring of banks should be “updated and rethought.”

Wall Street didn’t like what it heard on Wednesday — especially the apparently contradictory messaging from the Fed chair and Treasury secretary — and a broad sell-off erased gains from back-to-back market rallies earlier in the week. The Dow dropped by more than 500 points and the S&P 500 and Nasdaq Composite each closed down more than 1.5%.

But markets tend to be fickle after Fed meetings and traders’ opinions of the meeting could change in early trading. Investors also have a lot more to digest over the coming days.

The Fed announced its rate hike on Wednesday, but more central bank announcements are coming. Norway and Switzerland hiked rates earlier Thursday, and the Bank of England is expected to do so too at 8a ET. The Fed will also publish its Balance Sheet update in the early evening — investors will watch closely to see if more banks are taking out emergency loans.

In the United States, new home sales, mortgage rates and weekly initial jobless claims will be released and Fed officials are now out of their official quiet period — meaning they can start speaking publicly for the first time since the banking meltdown.

There’s a lot more coming, hold on to your hats.



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