The Fed signals that US interest rates are heading higher
The Fed’s policy
Tonight’s #FOMC Statement & press conference said they will act but not just yet. Yes rates will rise and there will be QT but for the moment they are not hiking and they are still buying assets. It’s the Saint Augustine approach to monetary policy: make me chaste - but not yet.
Powell’s press conference was clear about the issues - and that policy was nimble and that they did not have a currently planned path for rate hikes - he said they had “two sided risks” yet his message was both the jobs and inflation data point to tightening.
It was interesting to hear Powell state that the jobs market could cope with much tightening. He also acknowledged that fiscal policy will provide less of an economic boost. Importantly rate hikes will be the “active” tool & the balance sheet tightening “predictable”.
Powell made clear that they are “adapting” to an “evolving” economy - the focus is “maximum employment” & “price stability”. He noted the “historically strong” labour demand with payrolls up 6.4m over last year & that inflation was well above target & price rises had spread.
Alongside the tightly worded Statement, there was a release on “Principles for reducing the size” of the Fed’s balance sheet. Its last paragraph said “the committee is prepared to adjust any of the details of its approach” … so the principles may prove flexible.
An underlying takeaway is that the Fed does not want to spook the market or shock the economy, but it will have to hike to curb inflation and it wants to do this in an orderly and predictable way. As I wrote in @thetimes yesterday: speed, scale & sequencing are key!
All this points to a rate hike at the March FOMC meeting. Of course, before then, we may see two monthly employment reports where the jobs data are hit by the Omicron variant - these are likely to dampen market speculation about a more aggressive hike - but it is confirmation of future growth and also the inflation data before that FOMC meeting that will likely ensure that the Fed hikes by 0.25% in March.