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“You’ve seen our policy adapt and you’ll see it continue to adapt,” Fed chair Powell told members of the US Senate banking committee on 30 November. At the meeting of the Federal Open Markets Committee on 15 December, monetary policy was duly adapted, but the changes ruffled no feathers in financial markets.
Here is what was announced at the latest meeting of the FOMC:
- The committee confirmed the hawkish pivot initiated by Chair Powell on 30 November as he changed the Fed’s inflation narrative.
- An acceleration in the pace of asset purchase tapering to USD 30bn (USD20bn of Treasuries and USD 10bn of mortgage-backed securities) from USD 15bn previously. This was very much in line with market expectations. At this faster pace, the Fed’s asset purchases will end in March 2022. The FOMC continues to say it is ‘prepared to adjust’ the pace, although a further acceleration of the reductions looks unlikely at this stage.
- The reference to ‘transitory’ (inflation) has been replaced by a simple mention of ‘elevated’ inflation. Again, this matches market expectations after Powell’s remarks on 30 November.
- A modification to its forward guidance: the Fed is pointing out that as for inflation, the conditions for rate lift-off have been effectively met. This is, however, not yet the case for maximum employment, even though the Fed expressed strong confidence this second condition for higher interest rates will be met in 2022.
- An upward shift and acceleration in rate rises over the next three years, although the longer-run projection for the ‘terminal rate’ is unchanged. The median projection now envisages three rate rises in 2022 (up from two previously), three more in 2023 (as before) and two (down from three) in 2024. This is probably the clearest signal of a significant change in thinking. However, the Fed’s approach still appears to be that limited policy action will be required in 2023 and 2024. By the end of 2024, median estimates put the fed funds policy rate at 2.1%, still below the Fed’s estimate of the long-run policy rate of 2.5%.
- The Fed’s latest ‘dot plot’ indicates policy rates will still stay below the neutral level throughout the forecast horizon, even while the unemployment rate is low and inflation is above its 2% target. Financial markets took this as an early Christmas present for risk assets.