Asset Purchases to End in Early March
- The FOMC said that it expects to raise the fed funds rate soon; an increase is likely at the next meeting in mid-March.
- Most FOMC members believe that the economy has reached the committee’s objective of maximum employment.
- The Fed will wrap up its purchases of long-term assets in early March. The Fed will reduce its balance sheet in the future, but there is not schedule yet.
- Stocks fell and long-term yields rose in the wake of the statement and Powell’s press conference.
In its monetary policy statement this afternoon, the Federal Open Market Committee said that “will soon be appropriate to raise the target range for the federal funds rate.” In saying that the FOMC is likely to raise the fed funds rate soon, the committee cited “inflation well above 2 percent and a strong labor market.”
In the previous statement, on December 15, the FOMC did not describe a rate increase as coming “soon,” instead saying that inflation had been above 2% “for some time” and that the committee would act when the labor market achieved the FOMC’s goal of “maximum employment.” Thus today’s statement indicates that the FOMC believes that the economy is very close to, if not at, maximum employment. In his post-meeting press conference, Powell said that most FOMC participants, including himself, believe the economy is at maximum employment. However, he also said that the level of maximum employment could increase if more people return to the labor force.
The FOMC also announced today that it will wrap up the central bank’s purchases of long-term Treasurys and mortgage-backed securities “in early March.” These purchases put downward pressure on long-term interest rates; the FOMC introduced them in early 2020 after deciding the economy needed more support after cutting the funds rate to close to zero.
The FOMC was positive in its description of economic conditions, citing job growth and a steadily declining unemployment report. The statement cited continued improvement in sectors hit hardest by the pandemic, but also noted the drag from the omicron wave. The statement also high inflation tied to “supply and demand imbalances related to the pandemic and the reopening of the economy.” Later in the statement the FOMC says that an easing of supply constraints as the pandemic recedes should support “a reduction in inflation.” Although the FOMC has backed away from describing high inflation as “transitory,” this language does indicate that the committee thinks that much of the current acceleration in inflation is temporary, and that inflation should slow in 2022.
The statement once again notes that the path of the economy will depend on the path of the pandemic.
The decision was unanimous.
The FOMC also released a statement on the Fed’s balance sheet. In that statement, the FOMC said that it will start to release the size of the balance sheet “after the process of increasing the target range for the federal funds rate has begun.” In his press conference, Powell indicated that the balance sheet now is much larger than it needs to be over the long run, and that the FOMC will be discussing the process of balance sheet reduction in upcoming meetings. He also said that as of now there is no date yet for the start of balance sheet reduction.
Today’s FOMC statement indicates that the committee is ready to raise the federal funds rate at its next meeting, on March 16. The use of “soon” in FOMC statements generally indicates at the next meeting, and in his press conference Powell indicated a rate hike in March is likely. The Fed will complete its asset purchases in early March (perhaps in late February), and then shortly thereafter begin raising the federal funds rate. A gradual tightening in monetary policy will reduce the support the central bank is providing to the economy, relieving inflationary pressures.
PNC expects the FOMC to increase the federal funds rate four times in 2022, each time by 0.25 percentage point. This would bring the fed funds rate to a range of 1.00% to 1.25% by the end of this year.
In his press conference, Powell made it clear that the FOMC stands by its inflation objective of 2%, noting that a long economic expansion requires price stability. He also said that the FOMC does not want inflation of above 2% to become “entrenched” in the economy. This signals that the FOMC will act aggressively if required to achieve 2% inflation.
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