Yesterday, the highly anticipated Federal Open Market Committee (FOMC) meeting came to an end. The Fed ultimately decided to keep the federal funds rate stable with an eye on raising rates soon. It is still on track to end its net asset purchases in March.
Today’s ROIC dive covers highlights from the FOMC statement and Jerome Powell’s press conference.
What You Need to Know
- The FOMC decided to keep the target range for the federal funds rate at 0 to 1/4 percent.
- The Committee expects it will soon be appropriate to raise the target range for the federal funds rate.
- The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March.
- Read the Federal Reserve FOMC statement
- Read the Fed’s Principles for Reducing the Size of the Federal Reserve’s Balance Sheet
- Watch Jerome Powell’s 1-hour long, post-meeting press conference
- Watch Justin and Tom’s live reaction of the press conference on Unpopular Opinions
- December 15th Fed Meeting Summary and Impact – MacroHenry
Pull Quotes from the FOMC Statement
“Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.”
“The path of the economy continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain, including from new variants of the virus.”
“The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent. 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 Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March. Beginning in February, the Committee will increase its holdings of Treasury securities by at least $20 billion per month and of agency mortgage‑backed securities by at least $10 billion per month.”
“The Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”
Quotes from Jerome Powell’s Press Conference
- On Omicron’s impact on the economy
- “The recent sharp rise in Covid cases associated with the Omicron variant will surely weigh on economic growth this quarter. High frequency indicators point to reduced spending in Covid-sensitive sectors such as travel and restaurants. And activity more broadly may also be affected as many workers are unable to report for work because of illness, quarantines, or caregiving needs.”
- “If the wave passes quickly, the economic wave should as well, and we would see a return to strong growth. That said, the implications of the economic remain uncertain.”
- On the labor market
- “The labor market has made remarkable progress and by many measures, is very strong. Job gains have been solid in recent months averaging 365,000 per month over the past 3 months.”
- “The unemployment rate has declined sharply, falling 2 percentage points over the past 6 month reaching 3.9% in December.”
- “Labor demand remains historically strong. With constraints on labor supply, employers are having difficulties filling job openings, and wages are rising at their fastest pace in many years.”
- On inflation running above benchmark
- “Inflation remains well above our longer-run goal of 2%. Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. In particular, bottlenecks and supply constraints are limiting how quickly production can respond to higher demand in the near term. These problems have been larger and longer-lasting than anticipated.”
- “While the drivers of higher inflation have been predominantly connected to the dislocations caused by the pandemic, price increases have now spread to a broader range of goods and services. Wages have also risen briskly.”
- “Like most forecasters, we continue to expect inflation to decline over the course of the year.”
- On Fed policy
- “As I noted, the Committee left the target range for the federal funds rate unchanged and reaffirmed our plan, announced in December, to end asset purchases in early March.”
- “The economy no longer needs sustained high levels of monetary support. That is why we are phasing out our asset purchases, and we expect that it soon be appropriate to raise the appropriate range for the federal funds rate.”
- “Of course, the economic outlook remains highly uncertain.”
- On reducing the size of the Fed balance sheet
- “To provide greater clarity about our approach to reducing the size of the Federal Reserve’s balance sheet, today the committee issued a set of principles that will provide a foundation for our future decisions. These high-level principles clarify that the federal funds rate is our primary means of adjusting monetary policy and that reducing our balance sheet will occur after the process of raising interest rates has begun.”
- “Reductions will occur over time in a predictable manner primarily through adjustments to reinvestments so that securities roll off our balance sheet.”
- “The Committee has not made decisions regarding the specific timing, pace, or other details of shrinking the balance sheet. We will discuss these matters in upcoming meetings and provide additional information at the appropriate time.”
KR: The Federal Open Market Committee stayed consistent with its December 15th policy statement. The Committee finds it appropriate to continue the wind-down of asset purchases ending in March with rate hikes to follow. Following today’s FOMC statement, the major U.S. indexes stayed relatively flat but declined sharply once Chairman Powell took the stage to discuss the economic outlook.
In my opinion, the market was spooked by Jerome Powell’s non-commitment to a structured monetary policy, and instead focused on the need for the Fed to be “humble” and “nimble.” It seems to me like Powell’s base case is still that inflation is transitory and the main cause of inflation is the supply chain bottlenecks. The hope is that these supply-side issues start to get ironed out in the second half of the year. In the meantime, the Fed doesn’t want to overcorrect by raising rates too rapidly.