Thursday, March 17, 2022
The Federal Reserve (Fed) ended its two-day Federal Open Market Committee (FOMC) meeting yesterday and, as expected, the Committee voted (not unanimously however) to increase the fed funds rate by 25 basis points (0.25%) and signaled further rate increases were appropriate. Highlighting the disparate views on the Committee (also seen on the dot plot below), there was one dissenting vote (St. Louis Fed President Jim Bullard) who wanted a 50 basis point rate hike. Today’s rate hike was the first since 2018 and launches the first new rate hiking campaign since 2015.
“While the rate hike was expected, the revised dot plot showed the Committee is serious about bringing inflationary pressures back down,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “The Fed’s job, especially from this point forward though, is to prove that it can manage the removal of monetary accommodation without slowing the economy too much. It’s a tall order given the number of expected interest rate hikes this year.”
Also released was the updated “dot plot”, which provides the individual member’s projections on the future path of interest rates. As shown in the LPL Research Chart of the Day, there were some notable changes from the previous version. Now, the median dot of the Committee, in aggregate, reflects seven interest rate hikes in 2022, bringing the policy rate up to 1.9%. Three months ago, the Committee was expecting three rate hikes this year and a policy rate below 1%.
During the press conference Fed Chairman Jerome Powell mentioned that each meeting was “live” and a 50 basis point hike could be appropriate, depending on the path of inflationary pressures. Also, interestingly, the Committee expects to hike interest rates above its long-term neutral rate in 2023, holding rates steady in 2024 and then cutting rates thereafter.
Also of note, four times a year, the Fed updates its economic projections for the next several years as well as its longer-term forecasts. The Fed now sees 2.8% GDP growth in 2022 (down from 4.0% in December), and higher inflation expectations with PCE headline and core metrics, their preferred inflation measures, at 4.3% and 4.1% (up from 2.6% and 2.7% in December), respectively. The Committee sees inflation falling back to 2.7% headline and 2.6% core in 2023. The conflict in Eastern Europe was cited as providing uncertainty to the near term outlook for inflation and growth expectations but “the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity”.
Finally, Powell noted, during the press conference, that the Committee made good progress on a plan to cut bond holdings and expects to start to reduce the size of the Fed’s nearly $9 trillion balance sheet in the coming months—with an announcement potentially coming as early as May. According to Powell, balance sheet runoff, depending on how it’s structured, could act as an additional rate hike. Powell also hinted that additional details for balance sheet runoff will be outlined in the meeting minutes, set to be released in three weeks.
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