The Federal Reserve raised interest rates by 25 basis points as expected. What signal did the latest statement send?

On Wednesday afternoon Eastern Time, the Federal Reserve announced a 25 basis point increase in the benchmark interest rate, a move in line with market expectations. The rate hike brought the Fed's target range to 4.5%-4.75%, the highest level since October 2007.

In their statement on Wednesday, Fed officials acknowledged that "inflation has eased somewhat" and no longer emphasized the upward pressure on inflation caused by the Russian-Ukrainian war , which greatly encouraged investors' expectations of a policy shift. Financial markets reacted quickly. According to Bitpush terminal data, the Nasdaq Composite Index rose 2% to close at 11,816.32 points, and the S&P 500 rose 1.05% to close at 4,119.21 points. Bitcoin rose to $23,691 after the news was announced. As of press time, it rose 3.31% in 24 hours. The second largest cryptocurrency Ethereum rose similarly and was traded at $1,630.

Inflation remains high

However, the US central bank did not really hint at a pause in rate hikes. The meeting statement wrote: "Continued increases in the target range will be appropriate," and they will determine the extent of future rate hikes based on the impact of rate hikes so far, the lag time for policy to take effect, and the development of financial conditions and the economy. At the press conference after the meeting, Powell also opened with a hawkish stance, reminding people of the destructiveness of inflation and promising that the Fed is committed to reducing inflation to the target of 2%.

The U.S. Consumer Price Index (CPI) has fallen every month since June and is now at an annual rate of 6.5%, down from 7.1% in November, and the Personal Consumption Expenditures (PCE) price index has also fallen from 6.8% to 5% per year over the same period. However, the Fed said not all indicators saw a downward trend.

"We are actually seeing deflation in the goods sector, which is a good thing when we say inflation is coming down," Powell said. "But the core services measure outside of housing is not yet deflationary."

Fed expected to raise rates, but not by more

The Fed said in its meeting statement that it expects to "continue" to raise interest rates and is discussing the "extent" of future rate hikes. This means that at the next meeting in March, there will be another 25 basis point increase in interest rates, and it leaves room for the possibility of a same basis point increase at the May meeting.

"The Committee expects that continued upward adjustments to the target range will be appropriate to achieve a sufficiently restrictive stance of monetary policy to return inflation to 2 percent over time," members of the Federal Open Market Committee (FOMC) said in their report.

Fed officials in December projected raising their benchmark interest rate to a range of 5% to 5.25% in 2023, up from the 4.5% to 4.75% range set for this hike, and some economists worry that smaller rate hikes mean the Fed will struggle to meet its current forecasts.

"If inflation continues to trend lower, it may be difficult for them to achieve a 5-5.25% rate hike with two additional 25 basis point hikes," Joe Davis, an analyst at investment firm Vanguard Group, wrote in a statement.

Powell said at a news conference on Wednesday that the Fed's ultimate interest rate "will certainly be higher than where we have it on record now."

Fed sees slower growth in 2023, 'but no recession'

Powell said most FOMC members do not expect a recession this year.

He stressed at a press conference: "Different participants have different forecasts, but in general, the forecasts are for continued sluggish growth, some weakness in the labor market, rather than a recession. Growth will continue to remain at a fairly low level this year, but there are other factors to consider."

He cited positive international economic conditions, improving consumer confidence due to deflation, and state and local governments being "flush with cash."

Compared to the wording in the FOMC’s December meeting statement, the new statement indicated that the economic impact of Covid 19 and the war in Ukraine was weakening.

After contracting in the first two quarters of 2022, U.S. gross domestic product grew at an annualized rate of 3.2% in the third quarter and 2.9% in the fourth quarter, for a year-end gain of 2.1%. Economists say a soft landing will show up in the data as several consecutive quarters of flat growth.

“There is a good chance that the [Federal Open Market Committee] will engineer a soft landing for the economy that will involve several quarters of flat growth,” Boston College economist Brian Bethune wrote in an analysis.

Disconnect between market reaction and statements

U.S. stocks and crypto markets fell and then rose after the news was released. Some analysts believe that the Fed meeting tends to be "slightly dovish", but there is a disconnect between the market's reaction and the Fed's hints.

James Butterfill, head of research at CoinShares, tweeted that the Fed’s statement today added “nothing new that really moved markets, Powell tried to sound hawkish by stating the work is not done, but markets didn’t buy it.”

Charlie Ripley, senior investment strategist at Allianz Investment Management, told CNBC that the U.S. central bank's interest rate hike is nearing its end, and after the rate hike is over, the central bank may "stand by while economic data catches up with policy." He said: "The Fed is basically talking in circles. They hinted that further rate hikes are appropriate, but also acknowledged that they will consider tightening in future policy decisions."

Ronald Temple, chief market strategist at Lazard, commented: "The FOMC statement suggests that further rate hikes may be appropriate, while the market has only digested one rate hike. Combined with today's near-record job openings report, I think the market is still too 'dovish' about how high rates will go and how long they will remain. More resistance from the market will only lead to the Fed continuing to tighten conditions."