Today’s Fed meeting announcement started with a “mission accomplished” and continued on with “the hammers”. First off, another reminder that the Fed’s “dual mandate” has been met: “With inflation well above 2% and a strong labor market, it will soon be appropriate to raise the federal funds rate”.
How soon? Fed Chair Powell indicated that asset purchases are dropping to $30 billion in February and ending in March, so that’s his way of saying be ready for a March increase.
How much? The consensus seems to be a quarter percent (the first increase since Dec 2018). But, Powell also said “there’s quite a bit of room to raise interest rates without threatening the labor market”. Of course this will increase interest payments on home loans, credit cards, car loans, commercial real estate loans, etc. as the Fed is determined to remove liquidity from the system. This is leaving some room for a bigger increase in March.
The “third hammer” that markets have been watching is balance sheet runoff. The Fed also released a special statement regarding its planned approach for “significantly reducing the size of the Federal Reserve’s balance sheet”. It expects this process to commence after the increase in the federal funds rate has begun. So again, when? This could be as early as April. The big question is how much and how fast? Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
