Week in Review: Fed Raises Interest Rates Again but Extends a More Dovish Outlook for Financial Markets

Week in Review – Friday, March 24, 2023

Fed Raises Interest Rates Again but Extends a More Dovish Outlook for Financial Markets

The US Federal Reserve (Fed) announced on Wednesday that it raised the policy rate, federal funds rate, by 25 basis points to the range of 4.75-5% following the March policy meeting. This decision came in line with the market expectation which had retraced from a 50-basis point raise following the turmoil in the banking industry.

The post-meeting conference discussion noted that, while “the banking system is sound and resilient,” the recent banking stress is likely to “weigh on economic activity, hiring, and inflation.” In a prepared statement, the Federal Reserve removed the reference to “ongoing” hikes and noted instead that “additional policy firming may be appropriate” as the Fed “remains highly attentive to inflation risks.”

Besides the 25 basis point increase for March in the Federal Funds rate, a key output from the Fed is the Summary of Economic Projections or “dot plot” which is a forward-looking expectation by the individual Fed members of the Fed Funds rate and other economic data. The dot plot showed that the median view of the policy rate at end-2023 stood at 5.1%, suggesting one more increase this year in the Federal Funds rate. The dot plot then drops to 4.3% at the end of 2024 and 3.1% at the end of 2025 – a combined 200 basis points of cuts. Longer run, the Fed’s median view of fed funds rate is 2.5%.

The key takeaways from the Fed meeting are the increases in the Fed Funds rate that have weighed on valuation metrics for longer term fixed income and equities have likely peaked. While inflation remains currently elevated, the Fed believes that tighter credit conditions that weigh on economic activity, hiring and inflation are now adequately in place. Overall, the message was deemed dovish and should be supportive of asset valuation metrics, although the full impact on the economy and corporate earnings may have yet to fully play out due to the lagging nature of the Fed’s actions.

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Investment Advice offered through Pallas Capital Advisors, LLC, a registered investment advisor. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product referred to directly or indirectly in this newsletter will be profitable, or equal any corresponding indicated historical performance level(s)
Investment Advice offered through Pallas Capital Advisors, LLC, a registered investment advisor.

Mark A. Bogar, CFA^®, CAIA^®
Chief Investment Officer
Pallas Capital Advisors

Stephen Kylander
Senior Portfolio Manager
Pallas Capital Advisors

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Investment Advice offered through Pallas Capital Advisors LLC, a registered investment advisor.

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