Thursday, February 17, 2022
Federal Open Market Committee (FOMC) meeting minutes released. The Federal Reserve (Fed) released the meeting minutes from its January FOMC meeting (which ended on January 26) and there was little new information released. Fed officials noted that inflation pressures were still too high and that if these price pressures lingered, the Committee would remove policy accommodation at a “faster pace” than they currently anticipate. Additionally, the Committee acknowledged inflationary pressures had broadened over the second half of 2021 and risks to their inflation forecasts were to the upside. Still left unclear however, are the mechanics behind balance sheet reduction and if market expectations of a 50 basis point (0.50%) hike are actually on the table for the March meeting. It should be noted that the January meeting took place before the most recent upside consumer and producer price inflationary surprises.
“Unfortunately, there wasn’t anything new in these meeting minutes,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “Markets have already repriced for a number of rate hikes this year but the one thing still left uncertain is how the Fed plans to reduce its nearly $9 trillion balance sheet. Unfortunately, there were no new details so I guess we have to wait until the March meeting for more information.”
Has the Fed lost control of the inflation narrative? Inflation expectations are informative about how the current inflation experience has shaped the public’s views regarding future inflation. And the Fed pays close attention to how these expectations change over time. De-anchored inflation expectations tend to make further inflationary pressures self-fulfilling. So, it’s notable that earlier in the week, the Fed released its January Survey of Consumer Expectations, which showed a decrease in short- and medium-term inflation expectations. While still elevated, falling consumer expectations about future consumer prices increases is encouraging. Moreover, as shown in the LPL Chart of the Day, five-year average market-implied inflation expectations are in line with historical averages. It seems that, despite the elevated inflation readings we’ve seen over the past few months, markets and consumers still expect price pressures to abate, which could allow the Fed to take a more moderate approach to interest rate hikes.
Fed Governor vote postponed. A scheduled committee vote on all five Federal Reserve Board nominees, including Chairman Powell and Governor Brainard who has been nominated for vice chair of monetary policy, was postponed this week as top Republican senators in the Senate Banking Committee boycotted the scheduled vote. Democrats on the Senate Banking Committee were hoping to “package” all five governors to expedite the process as well as potentially make it easier for all five nominees to be approved with little ability for Senate Republicans to push back on certain nominees. Two of the nominees in particular, Sarah Bloom Raskin and Lisa Cook, are facing increasingly mounting opposition from Republicans, with Sarah Bloom Raskin, who is up for the vice chair of supervision position, receiving significant pushback on her views on, among other things, the Fed’s role in arresting climate change. The vote within the Senate Banking Committee is expected to be rescheduled.
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