The Federal Reserve followed the ECB this week by hiking rates. However, like the ECB, it also communicated that expectations of ongoing rate hikes should be reduced now, or at least it is keeping options open. The Fed played down banking contagion fears as it treads the fine line in trying to bring about a so-called soft landing. This may be the last Fed hike this year. However, the Fed, for now, doesn’t see any rate cuts this year, but this will depend on the path of inflation and the US economy.

The dot plot was hawkish

The dot plot was always where the Fed would reveal what it really felt about the ongoing banking crisis. The message was the same as December’s dot plot. A median rate of 5.1% for this year and no rate cuts until 2024.

This was a pushback against the STIR pricing and was a more hawkish decision. The Fed is not expecting to cut rates and Powell repeated this in the press conference afterwards where he said, ‘rate cuts are not in the Fed’s base case’. So, this was one of the reasons that stocks moved lower out of the press conference as STIR market rate cuts were contradicted by the Fed’s announcement.

The removal of the reference to ongoing rate hikes

When the statement was released market participants focused on the fact that the reference to ongoing rate hikes was removed. This saw a dovish reaction initially to the statement, but it faded in the Press Conference as Powell repeated that the Fed still needs to raise rates higher. However, this does give the Fed room to change direction if the data dictates.

Banking fears allayed

Powell reassured markets over the banking stresses and Powell said that prior to this the FOMC thought it would have to raise the terminal rate. So, Powell’s testimony reflected the uncertainty around the current situation and he gave himself room to do more or less as the situation demanded.


It was a mixed message with something for the hawks and the doves. However, on balance, it gives the Fed the option to hike rates further if the banking stresses fade. From here on inflation data will be super important as it will indicate how well the Fed is doing in bringing down inflation. Technically, the S&P500 has a large bearish engulfing bar on the daily chart. This will need to have its high broken to open up the chance of more upside. In the meantime that is a bearish technical feature that will invite technical selling.