A hawkish clarification
The Fed didn't raise rates today, but Chair Powell let the markets know it's coming.
After a teaser of a fairly straightforward Federal Reserve policy statement—asset purchases will end, rates will rise “soon,” balance sheet management will follow—a decidedly hawkish Jerome Powell appeared at the press conference podium earlier today.
In his remarks and in the Q&A that followed, the chair acknowledged that the state of inflation and employment would indicate the Federal Open Market Committee (FOMC) should be steadily moving away from accommodation. It’s the sort of wording that normally would accompany actual policy action, and was likely his way of communicating to the market that the Fed is on board even though it didn't announce a hike.
While Powell noted there has been substantial labor market progress, and that the gap between the number of job openings relative to the unemployed indicates there is “quite a bit of room to raise interest rates,” he repeatedly highlighted inflation risks. He wanted to make clear that, although policymakers still expect easing of supply chain dislocations, they are concerned that price increases have spread to a broader array of goods and services. Combined with brisk wage growth, they now think price pressures may threaten the economic recovery.
Essentially, Powell validated the shift in market expectations that has taken place with respect to near-term policy actions. And by referencing the differences between this recovery and the previous financial crisis, he left the door open for a more accelerated policy response than history might otherwise dictate.
Today’s meeting reaffirmed our expectation that the Fed will move sequentially with its tools to lessen monetary stimulus (Powell emphasized the fed funds target remains the FOMC's primary one). We continue to expect liftoff in rates to commence in March, and would not be surprised to see a faster pace of tightening once it is underway.