The Federal Reserve found itself facing a considerable dilemma this week at the Federal Open Market Committee meeting that took place Wednesday March 22, 2023. How would they balance the tension between their ongoing battle against inflation and the threats posed by the recent instability in the banking system?

Up until a few weeks ago, markets had been expecting a 0.50% increase at this month’s meeting. And then, over the course of the past two weeks, the banking system faced a series of stunning events that indicated the Fed may have forced something to “break.” That sudden and severe instability led some to believe the Fed would pause at this meeting, allowing them to wait and see if those events would have their own tightening effects.

In the end, the Federal Reserve “split the difference” – moving forward with a 0.25% increase, bringing the targeted range up to 4.75%-5%

Here are a few highlights and comments on the announcement and related press conference:

*Elephant in the room – Federal Reserve chairman Jay Powell did not skirt the issue of the banking system events. He started the meeting with directed comments regarding the recent events impacting the banking industry. He made it clear that American banking system is stable, sound, and resilient. He also reiterated the decisive action has been taken by the government which should give all depositors confidence that their money is safe

*Main goal remains – fight inflation– Once Chairman Powell addressed the banking system, he quickly reminded the audience that the Federal Reserve remains very focused on combatting the ongoing elevated level of inflation (and strength in the job market) with rate increases. He repeatedly said that price stability is the job of the Federal Reserve and they will keep going until they get it back to the target rate

*Key wording changes – In prior statements the Federal Reserve had alluded to higher for longer, using the phrase “ongoing increases in the target range will be appropriate.” In this release, the Fed took out that phrase and replaced it with “some additional policy firming may be appropriate…” Chairman Powell himself said “Focus on some and may – not ongoing“.

*Fed split the difference– In the Q&A portion of the press conference, Chairman Powell acknowledged that the Federal Reserve had been moving towards a 0.5% increase (and perhaps ongoing increases from there) prior to the banking system events that transpired in the past two weeks. He also admitted that post those events, the Fed had even considered a pause. But in the end, they landed on splitting the difference at 0.25%. He stressed the need to demonstrate their ultimate ability to get inflation under control, by sticking with both their planned actions and words. In addition, he noted how it was just too early to tell if the banking events would prove to be disinflationary (as anticipated).

*Banking crisis may tighten financial conditions – a key dialogue in the Q&A centered around the impacts the recent banking events will have on future rate actions. Chairman Powell noted that the events of the last two weeks are likely to have a tightening effect on financial conditions as banks may restrict lending and citizens may be less inclined to spend. These events in combination may very well have an impact that is similar or even greater than a rate hike – but again, it is too soon to tell

*Future still uncertain – there was a very clear message that even after a year of rate increases, the Federal Reserve is still taking things one meeting at a time. Uncertainty remains – and has been magnified by the stunning banking events. Once again, the Federal Reserve is waiting to see what impact its actions – and the banking system events – will have on inflation. Only time will tell

*Deposit safety – When asked about deposit safety, Chairman Powell responded “you’ve seen that we have the tools to protect depositors” when there is a serious threat to the economy or financial system, and that “regulators will use those tools.” (Note: Markets reacted positively to that statement but a short while later, when Treasury Secretary Janet Yellen said there was no current consideration of a higher FDIC insurance limit, markets gave up gains and turned meaningfully negative)

There never seems to be any easy answer for Fed officials and today was no exception. Perhaps they should have paused. Perhaps they should have moved forward with 0.50%. But instead they split the difference at 0.25% increase. Was that the correct decision? We will all learn the answer to that question one day at a time. As they say, only time will tell.

Onward we go,

Note: All commentary above is as of the date of this post and is for education and informational purposes only. Windermere and its principals do not intend for this to serve as investment advice and are not responsible for any actions taken based on this article. Consult your financial advisor before taking any actions as it relates to your own investment portfolio