Fed Meeting and Powell Comments Processed by Markets, March Rate Hike Is On

FS Insight Team

The Federal Open Market Committee (FOMC) held their much anticipated January meeting on Wednesday and made it clear they were still on track for a rate-hike in March. Markets initially rose after the statement but then they began giving up gains during Powell’s press conference. The Fed Chairman stressed that inflation risk was to the upside in his and most of the committee’s estimation. He opined on the balance sheet as well, saying it was far too large, but that the significant winding down needed would proceed in a deliberate and orderly fashion.

The Fed’s preferred inflation gauge, the core personal expenditures price index, rose 4.9% from a year ago. This is again a multi-decade high and was the highest gain since 1983. Even before this, after Powell’s hawkish comments investment banks had been tripping over themselves to up their projections for how many times the Fed would hike in 2022. Most banks raised their projections. Bank of America had one of the most aggressive predicting 7 rate hikes this year, or one at every remaining meeting.

The Fed may get some help from the labor market. Labor participation has been moving up and excess demand seems to be waning. This could potentially mean that some the wage inflation pressure we’ve seen recently (which notably hit some big banks in earnings) may be alleviating from current white hot levels. Consequently, the Fed might end up being less aggressive than many of the higher projections for rate hikes this year, or would at least have additional flexibility.

While there are concerns about slowing growth, there was good news on that front this week as well when the GDP growth rate came in at 6.9%, above expectations, and economic growth in 2021 was at the fastest annual pace since 1984. One potential problem area for the Fed going forward, as we’ve said in these pages, will be if inflation moves to shelter components given their outsized portion of the average American’s wallet.

The Fed was buying $40 billion worth of mortgage bonds a month, which ended up being more than all of the housing demand last year. Housing demand has also been affected by changes from the pandemic as millions of folks moved out of cities and reversed a stolid trend of urbanization. Demographics, low-inventory of existing homes and the tight labor market have made gains in home prices breathtaking. 

In a rare move the US Chamber of Commerce, one of the largest business lobbies in the country, issued a letter raising concerns about Sarah Bloom Raskin, the nominee for Vice Chair for Supervision. The objections primarily center around her stated desires to accelerate the transition from fossil fuels through the supervisory process, which is controversial since its outside the Fed’s typical mandates. This is another salvo in the fight over what the Federal Reserve should be involved in, and whether it should be trying to influence policy issues not within its statutory purview. Though the letter is a firm signal, Bloom Raskin has the advantage of having been confirmed before. The tapering of monthly purchases of $80 bn of Treasuries and $40 bn of MBS began in November, and was accelerated in December. The Fed is currently purchasing $60 billion of securities a month, half of the original level of purchases as it tapers. The Fed will be done with asset purchases in mid-March 2022 at this pace.  The benchmark yield on the 10-Year Yield was 1.78%

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