FOMC Signals Rate Hike Soon Citing Inflation Well Above Target and Strong Labor Market
by Craig Dismuke, Dudley Carter
The FOMC voted to keep its overnight target rate range unchanged at 0.00-0.25% and continue reducing its net asset purchases at $30b per month. In addition, they provided a strong signal for a rate hike “soon” and began the discussion of reducing its balance sheet. The vote was unanimous despite varying degrees of concern expressed recently by the voting members. The decision was largely as expected.
As it relates to its dual mandate, the Statement was modified to express more concern about inflation and satisfaction with the labor market progress. The December Statement assessed inflation as “having exceeded 2 percent for some time.” This language was changed in the current Statement to say that inflation has been “well above 2 percent.” Regarding the labor market, the Statement was changed from saying “until labor market conditions have reached levels consistent with … maximum employment” to simply assessing it as “a strong labor market.”
In light of inflation “well above 2 percent” and “a strong labor market,” officials now believe “it will soon be appropriate to raise the target range for the federal funds rate.” This change of language provides a strong signal for a March rate hike.
Despite fears that they are behind the curve on inflation, the Committee voted to continue reducing its asset purchases by $30b per month, $20b Treasury and $10b MBS, the same pace of reduction prescribed at their December meeting. At this pace, balance sheet expansion will drop from the current rate of $60b per month to $30b in mid-February and conclude in March.
In addition to signaling a rate hike, the Fed also released a separate document: Principles for Reducing the Size of the Federal Reserve’s Balance Sheet. In the document, officials note that they expect to begin reducing the size of their balance sheet “after the process of increasing the target range… has begun.” The release of this document hints at a quicker pace of tightening than in the aftermath of the Financial Crisis, when it took 21 months following the first rate hike to begin shrinking the balance sheet.
Fed Chair Powell will host a press conference at 1:30 p.m. CT. The next scheduled FOMC meeting will be held March 15-16.