The Federal Reserve entered wait-and-see mode after lifting rates by a quarter-point on Wednesday, as policymakers grapple with dueling challenges of inflation and stress on the financial system. A bank crisis that kicked off with the collapse of Silicon Valley Bank injected fresh uncertainty into the economic and policy outlook. While efforts to bolster the banking sector - including the UBS takeover of Credit Suisse - have allayed fears of contagion, Fed Chair Jay Powell noted that a potential tightening of financial conditions brought on by banking stress could have a similar effect on the economy as rate hikes. In its statement, the Fed said it "anticipates that some additional policy firming may be appropriate" to cool inflation, a change from its previous forecast for "ongoing" rate increases.

However, the latest rate hike signaled that tamping down inflation, which continues to run well above the 2% target, remained a priority for the Fed amid concerns that a prolonged fight will allow runaway price growth to become entrenched. In the UK, where data showed inflation accelerated last month, the Bank of England also raised rates by a quarter-point on Thursday. The Fed left its projection for the fed funds rate in 2023 unchanged, suggesting it expects one additional hike of 25 basis points before the end of the year. Powell added that policymakers do not currently foresee rate cuts this year, contrary to market expectations. In a new video, Ed Campbell of PGIM Quantitative Solutions recaps the Fed's actions this week and why investors viewed the rate decision as a dovish hike.