Fed Takes Another Swing At Inflation With Second Consecutive 0.25% Rate Hike

The SPDR S&P 500 SPY is volatile Wednesday afternoon following the Federal Reserve's decision to raise rates another 0.25%, marking its ninth straight rate increase. 

What To Know: Wednesday's 0.25% rate hike brings the target fed funds rate to a new range between 4.75% and 5%, the highest levels seen since before the 2008 financial crisis.

The move was in line with consensus expectations and marks the central bank's second consecutive 0.25% rate hike. The pair of quarter-point increases come on the heels of a 0.5% rate hike in December, which was preceded by four straight 0.75% rate hikes.

The Fed on Wednesday said 2% inflation remains its longer-term goal and the committee plans to continue letting Treasury securities and agency debt and agency mortgage-backed securities roll off its balance sheet on a monthly basis. 

"The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2%  over time," the Fed said in the FOMC statement. 

Why It Matters: The Fed had been repeatedly saying that "ongoing increases" were likely to be appropriate, but the new statement shows a change in Fed language. The Fed essentially pulled the reins when it chose to instead communicate that some policy firming might be needed.

Chances for a sharp 0.5% hike steadily increased earlier in March amid the Fed's semiannual Monetary Policy Report and hawkish comments from Fed Chair Jerome Powell, but that all changed following the collapse of a pair of banks, which has created ongoing worry about potential contagion in the broader banking industry. 

The bond market was weighing the possibility of either a 0.5% or 0.25% increase earlier this month, but ahead of the FOMC meeting, a 0.5% jump was removed from the equation. The market was favoring a 0.25% hike at approximately 85%, while a potential pause remained a slim possibility, according to CME Group data. 

In a press conference following the 0.25% rate hike, Powell said the committee will continue to make decisions meeting by meeting, but noted that there is still a "long way to go" to return inflation back to its 2% objective, adding the road to get there is likely to be "bumpy."

He further explained that the committee no longer sees "ongoing increases" as appropriate and instead they opted to say that  "firming" may be needed. 

In the days leading up to the meeting, a pause was in consideration, but Powell said the committee didn't want the recent banking events to completely steer it away from the course of action it saw as appropriate before the problems in the banking system showed up. Instead, the central bank opted to maintain its pace of policy, but change guidance.

Powell highlighted the Fed's choice of "some" and "may" in the phrase: "some additional policy firming may be appropriate." Still the committee remains determined to meet its longer-term goal. 

"We have to bring inflation down to 2%," Powell stressed. "There are real costs to bringing it down to 2%, but the costs of failing are much higher."

The Fed isn't due to make another decision on rates until early May. Following Wednesday's 0.25% increase, the market is showing a little more than a 50% chance of a subsequent 0.25% hike. 

SPY Price Action: The SPY was up 0.33% at $400.23 Wednesday afternoon, according to Benzinga Pro.

Photo: courtesy of the Federal Reserve.