The Federal Reserve hiked the Fed funds target rate by 25 bp as widely anticipated. It clearly signaled it was beginning an ongoing hiking cycle. The FOMC statement also indicated the balance sheet roll-off would begin at a coming meeting. The uncertainty posed by Russia's invasion of Ukraine was acknowledged, but the FOMC recognized that in the first instance it boosts price pressures while also weakening growth. There was one dissent. The noted hawk, St. Louis Fed President Bullard favored a 50 bp move.  

Nevertheless, the hawkish implication of the Fed's move was clear. The new projections see 150 bp of additional tightening this year, and the terminal rate is seen at 2.8% up from 2.1% in December. This is above what is regarded as the long-term equilibrium rate, which actually slipped to 2.4% from 2.5%. However, it sees peak being reached next year. Previously, it had the terminal rate in 2024. Seven officials' forecast implied at least one 50 bp move would be appropriate.  

Growth forecasts were cut for this year, with the median forecast now at 2.8%, down from 4.0% in December. The median projection for 2023 and 2024 were left unchanged at 2.2% and 2.0% respectively. Chair Powell played down the risk of a recession, noting the strength of the labor market and strong corporate and household balance sheets. Powell defended the 2.8% median GDP forecast as above trend (around 1.75%).  

Inflation projections were raised. The median now sees the PCE deflator, which the Fed target, at 4.3% this year, up from 2.6% in December. In 2023, the PCE deflator is seen at 2.7% rather than 2.3%, and in 2024, the median projection is 2.3% instead of 2.1%.

The markets responded to the hawkish message. The dollar and yields rose (bearish curve flattening) and stocks retreated. The opening gap created by the S&P sharply higher opening was filled. The dollar reached JPY119 and rose to new session highs against several other major currencies before stabilizing. The 10-year yield rose from around 1.86% to 2.24% before stabilizing. The 2-year yield reached almost 2.0% from about 1.87%.