An aggressive Fed
The Fed hiked rates and put inflation on notice with hawkish projections.
Stability is in short supply in the world, but the Federal Reserve is determined to find it, at least with respect to prices. While Russia’s invasion of Ukraine has added significant uncertainty into the outlook, the Fed clearly is centered on the price stability side of its dual mandate. While the 25 basis-point hike was expected, the clamor of the hawkish call pervaded every part of the Federal Open Market Committee (FOMC) meeting today. The statement, economic projections, dot plot and Chair Powell’s press conference were a collective screech. It made its raising of short-term interest rates almost an afterthought.
Powell recently telegraphed that action, which brings the fed funds target range to 0.25-0.50%, with unusual clarity, and it comes almost exactly two years to the day from when policymakers slashed rates to the zero bound as Covid arrived in force.
The path suggested by the dot plot showed assertive intentions for policy on the road ahead. The median estimate of a 175 basis points worth of hikes this year, inclusive of today’s announcement, and about another 100 basis points of increases in 2023, were even more hawkish than market pricing. The projections put the likelihood of a 50 basis-point jump on the table if inflation does not subside. The Fed is not going to hold back any tools to keep inflation from becoming intrenched. The summary of economic projections reflected that urgency, with a worrisome jump in participant expectations for PCE inflation to hit 4.3% in 2022 (it was 2.6% in December) and a drop in this year’s GDP to 2.8% from 4%.
Amid the hawk cries you might have heard money market investors exhaling with relief. The hike should be reflected in overnight rates as soon as Thursday morning, helped by the Fed’s decision to raise the rate on the Reverse Repo Facility a full 25 basis points to 0.30%. From an industry perspective, even this modest action should go a long way to providing relief to fee waivers and returning to an environment in which investors in liquidity products can earn higher returns.
Powell expressed confidence that labor market conditions could withstand the reduction in policy accommodation. He said excellent progress had been made on the discussion of reducing the balance sheet, a process that could begin as soon as the next FOMC meeting in May and the details of which should be disclosed in the release of the meeting's minutes in three weeks.