Federal Reserve Downshifts To 0.25%: Central Bank's Pace Of Interest Rate Hikes Slows With Inflation

The SPDR S&P 500 (NYSE:SPY) initially moved lower before reversing and turning positive after the Federal Reserve on Wednesday raised its benchmark rate by 0.25%, marking the central bank's second consecutive policy downshift.

What To Know: Wednesday's 0.25% rate hike brings the target fed funds rate to a new range between 4.5% and 4.75%, the highest levels seen since before the 2008 financial crisis.

The move was in line with average economist expectations and comes in the wake of a downshift from the Fed in December. At its last meeting, the central bank opted for a 0.5% hike, which was preceded by four straight 0.75% rate hikes.

On Wednesday, the Fed said it will continue with its plan to let Treasury securities and agency debt and agency mortgage-backed securities roll off its balance sheet on a monthly basis, as described in its previously announced plans.

"The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time," the Fed said in the FOMC statement. 

All 12 Fed members voted unanimously in favor of the 0.25% hike.

Why It Matters: The SPY is volatile. Although the Fed looks to be winding down its response to stubbornly high inflation, the central bank made it clear that it expects "ongoing increases" to be appropriate.

The Consumer Price Index (CPI) was up 6.5% in December, down from 7.1% in November and significantly lower than its peak of 9.1% in June.

Gross domestic product (GDP) increased 2.9% in the fourth quarter, according to an advance estimate from last week. A second estimated fourth-quarter GDP number based on more complete data will be released on Feb. 23.

The bond market is currently projecting an 84.7% chance of a subsequent 0.25% hike in March and a 15.2% chance of a pause, according to CME Group data. 

Fed Chair Jerome Powell has reaffirmed the central bank's commitment to bringing inflation back down to its 2% goal several times in recent months. He has been firm in saying the Fed will "stay the course until the job is done."

In a press conference following the decision on rates, Powell said the committee will continue to make decisions meeting by meeting and noted that the slower pace of rate hikes allows the central bank to better assess progress towards its goals. Markets reacted favorably and turned positive for the session.

"We're going to be looking carefully at the data between now and the March meeting ... I don't feel a lot of certainty about where that will be, it could certainly be higher than what we're writing down right now ... at the same time, if the data comes in in the other direction, then you know, we'll make data-dependent decisions at coming meetings of course," Powell said.

The Fed will get a look at a myriad of new data before it makes its next decision on rates in late March, the most important being the January CPI print, due two weeks from Wednesday. 

The Fed Chair noted that the committee has "no incentive and no desire to over tighten." Still, he reaffirmed that the Fed believes there is still "a lot of work left to do."

SPY Price Action: The SPY is up 0.23% at $407.41 at the time of writing, according to Benzinga Pro.

Image from Shutterstock.