Rarely have interest rate views whipsawed like this before a US Federal Reserve monetary policy. The view on Wednesday's monetary policy decision swung from a hike of 50 basis points two weeks ago to 25 bps to even zero as unintended consequences of past rate hikes threatened to destabilize the US banking system.

In the end, the Federal Open Market Committee settled for a 25-bps increase in the Fed funds target rate range to 4.75-5.00%.

The committee, which has now increased the policy rate by 475 bps within a span of one year, however, indicated that the interest rate hike cycle may be nearing its end.

The committee substituted the words "ongoing increases in the target range will be appropriate", which has been there in all policy statements since March 16 when Fed started hiking interest rates, with "some additional policy firming may be appropriate" this time.

This is a far cry from Fed Chair Jerome Powell's testimony to the US Senate earlier this month that the central bank was prepared to accelerate the pace of rate hikes. But then that was before Silicon Valley Bank collapsed dramatically on March 10.

Banking Crisis

The 25-bps hike on Wednesday is a halfway house between commitment to fight inflation and financial stability.

Though the committee assured that the US banking system was "sound and resilient", there are fears that the failure of banks, including Silicon Valley Bank and Signature Bank, could set off a contagion, and interest rate hikes could fuel that.

Addressing a press conference after the monetary policy statement, Powell said that officials considered not raising interest rates in view of the banking system's stress.

The Fed chair blamed the management of Silicon Valley Bank rather than a systemic failure for the collapse of the bank. The management of the bank "failed badly", he said, adding that there were no weaknesses "running broadly through the banking system".

Powell's assurance failed to calm the nerves in the equity markets with the US benchmark indices falling sharply on Wednesday.

The markets, in fact, gave more credence to Treasury Secretary Janet Yellen's comments that the government was not considering insuring all uninsured bank deposits.

In a sign, that crisis is far from over, shares of First Republic Bank, which has been tottering for some time, fell 15.5% on Wednesday.

Dot Plot

Though the monetary policy statement was definitely more dovish, the dot plot--a chart with projections of short-term interest rates by Fed officials--was largely similar to the projections in December.

The dot plot showed that the majority expects just one more 25-bps hike in the rest of 2023, the same as the projections made in December. None of the 18 policymakers projected a rate cut in 2023.

At the press conference, Powell said rate cuts in 2023 were not in "base case" and the Fed was committed to restoring price stability.

However, with the banking crisis still unfolding, there is a possibility that this could well be the last rate hike before a long pause and a rate cut at the end of the year.

According to CME's FedWatch tool, 62% expect Fed to keep interest rates unchanged at the next meeting on May 2-3.

What Next?

The rate hike by the Fed has cut short the work of the Monetary Policy Committee of the Reserve Bank of India.

The die for a rate hike by the RBI was cast when CPI inflation surprisingly rose to 6.52% in January. Though inflation eased marginally in February, it still remains above the upper limit of RBI's target of 2-6%.

A pause by the Fed could have made the decision much more complex.

With the US Fed deciding to hike interest rates by 25 bps, it is likely the RBI will do an encore on April 6, before entering into a long pause.

The main takeaway from Wednesday's decision seems to be that the end of the tunnel is in sight.