Fed Chair Jerome Powell: We feel like our communications are working

Facing both turbulent financial markets and raging inflation, the Federal Reserve on Wednesday indicated it could soon raise interest rates for the first time in more than three years as part of a broader tightening in historically easy monetary policy.

In a move that came as little surprise, the Fed’s policymaking group said a quarter-percentage point increase to its benchmark short-term borrowing rate is likely forthcoming. It would be the first increase since December 2018.

Chairman Jerome Powell added that the Fed could move on an aggressive path.

“I think there’s quite a bit of room to raise interest rates without threatening the labor market,” Powell said at his post-meeting news conference. After being up strongly earlier, the major stock market averages turned negative shortly following Powell’s pronouncement.

The committee’s statement came in response to inflation running at its hottest level in nearly 40 years. Though the move toward less accommodative policy has been well-telegraphed over the past several weeks, markets in recent days have been remarkably choppy as investors worried that the Fed might tighten policy even more than expected.

The post-meeting statement from the Federal Open Market Committee did not provide a specific time for when the increase will come, though indications are that it could happen as soon as the March meeting. The statement was adopted without dissent.

“With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be
appropriate to raise the target range for the federal funds rate,” the statement said. The Fed does not meet in February.

In addition, the committee noted the central bank’s monthly bond-buying will proceed at just $30 billion in February, indicating that program is expected to end in March as well at the same time that rates increase. Powell said later that the asset purchases indeed likely will end in March.

There were no specific indications Wednesday when the Fed might start to reduce bond holdings that have bloated its balance sheet to nearly $9 trillion.

However, the committee released a statement outlining “principles for reducing the size of the balance sheet.” The statement is prefaced with the notion that the Fed is preparing for “significantly reducing” the level of asset holdings.

That policy sheet noted that the benchmark funds rate is “primary means of adjusting the stance of monetary policy.” The committee further noted that the balance sheet reduction would happen after rate hikes start and would be “in a predictable manner” by adjusting how much of the bank’s proceeds from its bond holdings would be reinvested and how much would be allowed to roll off.

“The Fed’s announcement that it will ‘soon be appropriate’ to raise interest rates is a clear sign that a March rate hike is coming,” noted Michael Pearce, senior U.S. economist at Capital Economics. “The Fed’s plans to begin running down its balance sheet once rates begin to rise suggests an announcement on that could also come as soon as the next meeting, which would be slightly more hawkish than we expected.”

Markets had been anxiously awaiting the Fed’s decision. Stocks added to gains afterwards while government bond yields were mostly higher, though only slightly.

Investors had been expecting the Fed to tee up the first of multiple rate hikes, and in fact are pricing in a more aggressive schedule this year than FOMC officials indicated in their December outlook. At that time, the committee penciled in three 25 basis point moves this year, while the market is pricing in four hikes, according to the CME’s FedWatch tool that computes the probabilities through the fed funds futures market.

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[puzzlespillet]

Same bull as every other meeting... We are not gonna do anything, but soon!...

[davidduffy]

Really? The markets don't see it that way

[a.a.]

PLEASE READ THIS CAREFULLY: If the Fed’s rate is raised more than 0.25-0.50, the US government must allocate almost one trillion dollars for bond interest rate payments. I see several-rate rises as empty threats. While the Fed’s rate is currently very low, the US government already pays almost half-trillion dollars interest payments to bondholders, which is equivalent to the total health annual budget. Now if they double the Fed’s rate, imagine the US government has to sacrifice education, defense, social securities, infrastructure, and health in the budget for interest payments for bondholders. Please check the US budget yourself. Don’t be fooled by this impossibility. The Fed wants the fear to suppress the market instead and do the dirty work.

[Gilmourist]

assures us inflation will not become entrenched.
Then buys billions in treasuries this month.

[googlebanmetoomuch]

It's only down 10% from record highs🙌🤪

[Mikesorrento]

Powell inherited a $hit sandwich 50 years in the making.