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Fed decision: Wall Street reacts to a 'hawkish pause'

The Federal Reserve raised interest rates by 0.25% as expected on Wednesday. With the move largely already priced into markets, Wall Street's focus centered on what Fed Chair Jerome Powell said surrounding the Fed's next meeting in June and beyond.

While he said that keeping rates steady wasn't something Fed officials considered for May, he left the door open to a pause in June. Powell pointed to a "meaningful" change in the Fed's statement that swapped in language about the Fed determining "the extent to which" it may need to raise rates; previously, the Fed said it had "anticipated" future rate hikes.

Still, stocks ended the day lower after Powell dashed Wall Street's hopes of rate cuts ahead.

"Inflation [is] going to come down not so quickly," Powell said in a press conference on Wednesday. "It will take some time. And in that world, if that forecast is broadly right, it would not be appropriate to cut rates."

Here's how Wall Street reacted to the latest decision and comments from Powell:

Jay Bryson, Chief Economist, Wells Fargo

"In our view, the Committee is signaling a hawkish pause in the tightening cycle. That is, the FOMC could clearly hike rates again, especially in light of the sentence in the statement reiterating that Committee members remain 'highly attentive to inflation risks.' However, the bar to hike again on June 14 appears higher than it has been at past meetings since March 2022."

Michael Gapen, U.S. Economist, Bank of America

"For now, inflation still dominates and data in hand outweighed uncertainty from bank stress in terms of the decision to raise rates in May. We think the Fed has reached its terminal rate in this tightening cycle, though we note that there are two employment reports and CPI inflation reports before the June FOMC meeting (the second CPI report comes on the first day of the June meeting). Should regional bank stress stabilize, labor markets stay tight, and inflation stay elevated, a rate hike in June could become appropriate."

Rick Rieder, Chief Investment Officer of Global Fixed Income, BlackRock

"Today’s Federal Reserve actions suggest that the central bank clearly still has inflation reduction as its primary objective, but that process is entering a new phase. After a multi-month process of tightening monetary policy to a level that would slow down the economy, and consequently reduce the extremely elevated levels of inflation; it appears now as if this level has been reached, or at least we’re very close to it...It appears clear to us that policy restrictiveness is finally having an impact on the economy."

Federal Reserve Chairman Jerome Powell holds a news conference after the release of U.S. Fed policy decision on interest rates, in Washington, U.S,  May 3, 2023.  REUTERS/Kevin Lamarque
Federal Reserve Chairman Jerome Powell holds a news conference after the release of U.S. Fed policy decision on interest rates, in Washington, U.S, May 3, 2023. REUTERS/Kevin Lamarque

Andrew Hunter, Deputy Chief U.S. Economist, Capital Economics

"After tightening policy at a near-unprecedented pace over the past year, officials are finally now willing to step back and assess the damage. That said, the new guidance still leaves the door open to further tightening in the future if conditions warrant. The only other change to the statement of note was that jobs growth is now described as 'robust' rather than having picked up."

Ryan Sweet, Chief U.S. Economist, Oxford Economics

"The post meeting statement removed language that 'some additional policy firming' may be warranted. This isn’t surprising as the stress in the banking system will do some of the heavy lifting for the Fed as a tightening in lending standards will weigh on economic activity in the second half of the year. Therefore, the Fed will likely not hike rates in June."

Ian Shepherdson, Chief Economist, Pantheon Macroeconomics

"We expect the two rounds of payroll, CPI, PPI and activity data between now and the June meeting to confirm that the economy has weakened markedly and that inflation pressure is receding, so we think the Fed will leave rates on hold. Note that it is entirely possible that the debt ceiling situation is at crisis point at the time of the June meeting, with markets in turmoil, adding to the case for the Fed not to act. We think the Fed’s next move will be an easing, in September or November."

Thomas Simons, US Economist, Jefferies

"The language leaves the door open for additional rate hikes, but Powell's tone in the press conference suggests that their expectation is that the terminal rate has been reached. Without the emphasis on further 'policy firming', it seems that the language in the statement puts greater weight on the lagged effects of the cumulative tightening to-date. Whether this rate hike will be the last depends on developments in the underlying forces that fuel inflation."

Dennis Lockhart, Former President, Federal Reserve Bank of Atlanta

"It was the decision they had to make. As he pointed out in the early comments, we still have an inflation fight in front of us. They did not have enough information to let financial stability concerns override policy decisions. I'm not at all surprised it was unanimous. That, I think, is what happened at this meeting."

Josh is a reporter for Yahoo Finance.

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