Driving the point home
With a 50 basis-point hike, the Fed hopes to stick it to inflation.
Monetary policy often is thought of as a blunt instrument, taking a while to achieve its goals. In recent months, and in the press conference to today’s policy-setting announcement, Federal Reserve Chair Jerome Powell has been laboring to sharpen it. After essentially revealing a few weeks ago that officials would raise the target range of the fed funds rate by 50 basis points, he all but laid out the near-term path: “yes” to more 50 basis-point hikes in the next couple meetings; “no” to jumps of 75. It seems that when he says something is “on the table,” he means it will happen.
That was born out today when the Federal Open Market Committee satisfied market expectations by shifting the range from 0.25-0.50% to 0.75-1%, while also confirming it will passively reduce its balance sheet starting June 1 with a cap of $30 billion Treasuries and $17.5 billion mortgage-backed securities per month allowed to roll off, ramping up to $60 billion and $35 billion in September.
Powell began the press conference with a direct statement to the American public acknowledging that inflation is much too high and pledged that the Fed would be highly attentive to it—a statement that became a refrain in his presser. While the tone was suitably hawkish, the front end has retraced from recent highs in yields as it adjusts to the unlikelihood of a 75 basis-point hike. Powell emphasized that monetary policy has been working through or amplified by market expectations for higher interest rates.
All told, our expectation of a front-loaded monetary policy remains on track, as the Fed will approach—and perhaps likely move past—a neutral stance fairly quickly. This Fed is not going to shy away from overshooting, that is, tightening policy above the neutral rate, and then having to pull back later. While the Fed would like to achieve a soft landing (or “softish” as Powell described it), it seems clear that the urgent focus of the Fed at this moment is to rein in price pressures as expeditiously as possible.