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About two weeks ago U.S. Federal Reserve At the end of the December monetary policy meeting, Jay Powell sent a clear message to U.S. lawmakers and market participants that change is underway.
On the last day of November, the chairman of the Federal Reserve said to the members of the Senate Banking Committee: “You have seen our policy adjustments and will continue to adjust.”
On Wednesday, the scope and scale of this adaptation has been clarified, and the U.S. Central Bank announced that more Retreat quickly Its stimulus plan during the pandemic. As inflation soars and the labor market recovers, this move will give the Fed more flexibility when raising interest rates early next year.
Diane Swonk, chief economist at Grant Thornton, said: “As far as they are concerned about longer-lasting and problematic inflation, this transition is complete.” “This is a late realization, but they It’s there, it’s important.”
As stimulus measures including monthly government bond purchases will end in March, Fed officials now expect to raise interest rates three times in 2022.
Compared with a few months ago, the policy makers at the time were divergent on the concept of rising interest rates from the current close to zero in 2022, and this pace was significantly more radical. Members of the Federal Open Market Committee and other regional Fed presidents said they support three more interest rate hikes in 2023 and two more interest rate hikes in 2024.
Although the new coronavirus cases associated with the Omicron variant are worrisome, the Fed’s less patient approach and its transition from ultra-loose monetary policy highlights the tremendous pressure on the central bank to take more steps to tame inflation.
Powell justified the hawks’ position by emphasizing the potential power of the economy. U.S. economy, Fed officials expect growth of 5.5% and 4% this year and next year, respectively, and inflationary pressures to spread across the wider economy. At the press conference, he also emphasized the importance of maintaining price stability to support stable and more inclusive growth.
He admitted that the current level of inflation is “not at all” the Fed is launching New policy framework Last August, this showed a higher tolerance for faster consumer price growth. According to the Fed’s median forecast, core inflation is currently 4.1% and will only slow to 2.7% next year. Therefore, the central bank announced that it has reached an inflation test for raising interest rates.
Although Powell pointed out that progress in maximizing employment is “rapid”—so much so that there is no “long delay” between the end of the bond purchase program and the first rate hike—but the hawkish turn seems to indicate that “at the Fed Seth Carpenter, who has worked for 15 years, said that the hierarchy of the Fed’s dual priorities of full employment and stable prices is changing.
“The way they formulated their policy approach before Covid was in a very, very long expansion world, where the unemployment rate was very low, inflationary pressures were still very low, and the recent history of inflation was too low relative to the target,” Carpenter said , He is now the chief global economist of Morgan Stanley. “Because the world has changed tremendously, their methods are changing to deal with it.”
The Fed has previously stated that it will keep interest rates close to zero until it achieves an average inflation rate of 2% and a maximum employment rate over a period of time.
Powell said on Wednesday that the future job market may be different from the job market before the Covid shock, especially in terms of labor participation, indicating that the Fed may be willing to raise interest rates before the full set of labor statistics are similar to the data in February 2020.
“They definitely lowered their expectations for near-term earnings,” said Julia Coronado, a former Federal Reserve economist who is now at MacroPolicy Perspectives. “Their ultimate goal now is to stabilize expansion and make them feel the need to ease inflationary pressures. This means canceling more accommodation sooner than they had previously expected.”
The financial market calmly responded to the Fed’s more confident posture. The S&P 500 index rose 1.6%, and the technology stocks Nasdaq Composite Index rose 2.2%.
After serving as the deputy governor of the Bank of Canada, Jean Boivin, now head of the BlackRock Investment Institute, attributed the positive response partly to the so-called “moderate hiking cycle” implied by the so-called dot plot of personal interest rate forecasts.
Most Fed officials expect that the policy rate will only reach 2.1% in 2024, well below the long-term target of 2.5%. The expectations implied by the futures market were even more sluggish, indicating that the level at the time was 1.5%.
“Their dots indicate faster speed, but they will end up in the same place,” Boivin said. “It didn’t send a message that we really need to apply the brakes here.”
Swank warned that if the Fed does substantially tighten policy to eradicate deep-rooted inflation, financial markets may face the risk of a sharp sell-off.
She said: “Many interest rate hike cycles involve the Fed in competitions, and then they have to withdraw.” “The market seems to expect this to happen again, but it does not admit that this time it will be different.”
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