FOMC Lifts Fed Funds By 25 bps, Hawkish Talk From Members Grow, Dot Plot Suggest Six More Hikes This Year

FS Insight Team

The Fed conducted its long-awaited lift-off and the market appeared largely encouraged by the choreographed nature of it all. Shorty after lift-off, there was a few hawkish comments from Federal Open Market Committee (FOMC) members that we’ll discuss below, but overall the reaction from the market has been positive and lift-off happened to coincide with one of the most positive weeks for stocks in a year.

The vote for raising the Federal Funds target from a range of 0 to .25 to a range between .25 and .50 was 8 to 1. The only dissent was St. Louis President James Bullard who would have preferred to have made a 50-bps hike.  The committee also announced that it expects its plan for the balance sheet to be ready by May 3-4.  Chairman Powell commented that the labor market was very tight, maybe even problematically so. The very tight job market raises the unwanted specter of a potential wage-price spiral.

Prices are stickier for things like rent and also services where a high proportion of input cost is related to wages. Rents increased at an annualized rate over the last six months which marked the fastest pace since 1986. Despite this, after one of the most anticipated Fed announcements in recent memory, markets closed higher. Growth expectations were down and inflation expectations were up.

The dot plot suggested that the FOMC participants currently expect to conduct six more rate raises before 2022 is over, which would mark the most aggressive pace of rate hikes in over a decade. The committee is largely focused on countering inflation now, and despite this anticipated pace, the calls for even more aggressive action are mounting. Powell expressed an admiration for Volcker in his testimony earlier this month, he may get an opportunity to put his money where his mouth is.

Federal Reserve Governor Christopher Waller appeared on CNBC on Friday. Waller said that while he voted for the recent 25 bps hike given the uncertainty surrounding geopolitical events that he believes in a more aggressive strategy to tame inflation, including the policy of “front-loading” hikes to have a more immediate effect. This approach would include some 50 bps hikes in the coming meetings.

St. Louis Fed President James Bullard also released his statement explaining why he was the sole dissenting vote on Friday. He explained that he would like to see the benchmark interest rate boosted to 3% by year-end, which would mean an equivalent of twelve 25 bps hikes would be needed before year-end. Both Bullard and Waller want to see aggressive action in shrinking the Fed’s balance sheet.

On Tuesday Sarah Bloom Raskin, who was nominated for Vice Chair for Supervision of the Federal Reserve, withdrew her nomination after it was mired and controversy. On Monday, Senator Joe Manchin said he was unwilling to vote for Raskin which all but doomed her vote. Her op-ed about using the supervisory process to implement climate policy goals and ties to a FinTech company had caused Senate Republicans to boycott the vote on her nomination, which also held up other nominations including that of Chairman Powell.

However, after Bloom Raskin removed her nomination, the remaining nominees were approved. Powell got every single vote except for one, from Senator Elizabeth Warren who opposed. Many questions await the Fed as lift-off has now begun. With the added difficulty of inflationary pressure and potential financial distress from Ukraine, the task of how quickly to raise rates is even more complicated than before. The tapering of asset purchases has concluded. The Fed will provide details on plans to contract the balance sheet at their May meeting. The benchmark yield on the 10-Year Yield was 1.927%

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