Liftoff in March

The Fed stayed the course today, with no change in the Fed Funds rate, no adjustment to the pace of tapering, no shift in the timeline for raising rates, and no indication that they intend to lift rates in larger steps.

Barring a sharp change in the economic outlook, the Fed looks virtually certain to raise the Fed Funds rate by 25 basis points at the March meeting. When pushed during the press conference, Chair Powell was very intentional not to commit to a pace of hikes as the year progresses. We could see hikes at every meeting or every other meeting, only time (and the data) will tell.

One area where we did get some clarification from the Fed came with regards to the balance sheet. In addition to confirming that tapering will conclude in early March, the Fed published guidance on the path towards reducing the size of the balance sheet. Some have questioned if the normalization process would start in March along with rate hikes, but today’s announcement shows the Committee expects to wait until after rate hikes are under way. It was also notable that there was no indication that the Fed is considering the outright sale of assets. Instead, guidance mimicked reductions coming through the management of monthly reinvestments as occurred back in 2017.

The Fed is behind the curve on fighting inflation, tapering should already be over, and rate hikes should already have begun. The risk today is that the Fed moves too slowly, not too quickly. Inflation is likely to remain stubbornly high throughout 2022 and beyond, and the biggest question today is how long it takes for the Fed to step up to the challenge.