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What Wall Street is saying about the Fed's last interest rate hike, Powell comments

The Federal Reserve is still playing inflation fighter despite investor focus on a banking crisis that has taken down the likes of Silicon Valley Bank, Signature Bank (SBNY), and Credit Suisse (CS).

The Fed lifted the target range for its benchmark interest rate by 25 basis points on Wednesday, with Chairman Jerome Powell suggesting to reporters that rates could have been hiked by 50 basis points if not for pressures in the banking system.

Powell also took rate cuts off the table for the time being.

"Inflation remains too high and the labor market continues to be very tight," Powell said. "My colleagues and I understand the hardship that high inflation is causing, and we remain strongly committed to bringing inflation back down to our 2% goal."

Powell's more hawkish tone helped send stocks plunging on Wednesday.

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Here's what Wall Street is saying post the closely watched Fed Day.

Moody's Analytics Chief Economist Mark Zandi (video above): "I was disappointed. You know, I thought that they should pause in their rate hikes. It seems very incongruous that one week, you're establishing a credit facility to provide liquidity to the banks so they can pay off depositors, to take pressure off the banking system. And then the next week, you're raising interest rates, which will clearly put pressure on the banking system. So I don't know how to square those two things."

Wells Fargo Head of Macro Strategy Michael Schumacher: “The market is pricing rate cuts too soon in our view. We expect the 8 basis points of cuts implied for June FOMC to be priced out fairly soon. This should help boost the 2-year Treasury yield back to 4.10%.”

Deutsche Bank's Matthew Luzzetti: "With today's meeting largely in line with expectations, we maintain a terminal rate view of 5.1% delivered with one more 25 basis point rate hike in May. There is elevated uncertainty around this expectation. If financial and credit conditions deteriorate quicker than anticipated and/or disinflation proceeds faster than expected, the Fed could pause their tightening cycle. Conversely, if the anticipated tightening from credit conditions does not materialize, and/or inflation continues to surprise to the upside, the Fed will have to raise rates to a higher level to achieve a policy stance that is "sufficiently restrictive."

EvercoreISI's Krishna Guha: "Powell’s press conference emphasized hot macro data more than the statement in ways that underlined the inflation constraint. His tone was perhaps a bit too business-as-usual for a banking crisis. Certainly, it challenged the thesis that bank stress could be a positive for equities: either tightening is coming from credit or rates will have to go up more. His reaffirmation that in the base case the Fed sees no cuts this year went down badly. There was no news here, and Powell was actually careful not to exclude rate cuts. But it is a reminder that while the hurdle for pausing is low the hurdle for cutting is high, and preemptive cuts are off the table with inflation this elevated. Which is not new but is a problem for risk-takers."

Goldman Sachs Chief Economist Jan Hatzius: "We have left our forecast for the peak funds rate unchanged at 5.25-5.5% and now expect additional 25 basis point rate hikes in May and June. Our baseline forecast is 25bp above the FOMC’s forecast of 5-5.25%, and our weighted-average path for the funds rate is above market pricing."

Federal Reserve Board Chair Jerome Powell holds a news conference after the Fed raised interest rates by a quarter of a percentage point following a two-day meeting of the Federal Open Market Committee (FOMC) on interest rate policy in Washington, U.S., March 22, 2023. REUTERS/Leah Millis
Federal Reserve Board Chair Jerome Powell holds a news conference after the Fed raised interest rates by a quarter of a percentage point following a two-day meeting of the Federal Open Market Committee (FOMC) on interest rate policy in Washington, U.S., March 22, 2023. REUTERS/Leah Millis (Leah Millis / reuters)

Sevens Report Research Founder Tom Essaye: "The Fed hiked rates 25 basis points, but for the first time since the hiking cycle began a year ago, signaled the end of rate hikes is near (or already upon us) and markets initially cheered that change. However, the bigger issue for this market remains unchanged from the start of 2023, namely that what will determine the next 10%- 15% in the S&P 500 isn’t whether the Fed hikes 25 basis points more, but instead whether we get a hard or soft economic landing. As such, we don’t see yesterday’s signal of a looming end to rate hikes sustainably bullish."

JPMorgan's Michael Feroli: "Powell generally adhered to the idea of separating financial stability from monetary policy tools, albeit with limitations. Asked if he was concerned that a rate hike could exacerbate the problem at banks he said the rate decision was “focused on macroeconomic outcomes” and that the situation with the banks would be addressed with their lending facilities. That said, it’s hard to cleanly separate these issues, and the statement now notes that recent banking developments are “likely to result in tighter credit conditions.”

Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on the banking crisis? Email brian.sozzi@yahoofinance.com

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