Hike rates

Fed Chairman Powell’s presser shows FOMC could hike rates +0.25% in all six remaining meetings and start QT by June

On Wednesday, in addition to Russian-Ukrainian geopolitics, the focus was also on the US economy as the market awaited the outcome of the Fed’s policy meeting and Chairman Powell’s presser (Q&A). Predictably, the Fed raised the rate by +0.25% and forecast six more hikes in 2022. In the presser (Q&A), Fed Chairman Powell almost ruled out the possibility of a +0.50% rate hike in May or any subsequent meeting to preload rate hikes contrary to some market expectations. So the Fed is expected to rise almost on autopilot mode @ +0.25% in every remaining policy meeting in 2022; i.e. May 4, June 15, July 27, September 21, November 2 and December 14. Powell also made it almost clear that the Fed was actively discussing the QT (balance sheet reduction) process, would announce the terms at the May meeting, and could launch the process from June.

Highlights of Powell’s comments during the Q&A (Presser):

THE PROBABILITY OF A RECESSION IS NOT EXTREMELY HIGH

THE FED IS DOING EVERYTHING TO FULFILL ITS MANDATE OF PRICE STABILITY AND MAXIMUM EMPLOYMENT

THE FOMC IS DETERMINED TO RESTORE PRICE STABILITY

THE ECONOMY IS WELL POSITIONED TO RESIST STRONGER MONETARY POLICY

THE ECONOMY IS “WELL POSITIONED TO FACE INTEREST RATE RISES”

WITH A LESS ACCOMMODATIVE POLICY, THE ECONOMY SHOULD PROSPER

ALL INDICATIONS POINT TO STRONG ECONOMY

· FED MONETARY POLICY SHOULD BE AGILE AND HUMBLE

ECONOMIC GROWTH OF 2.8% IS STILL QUITE STRONG

THE WAR IN EASTERN EUROPE WILL HIT THE UNITED STATES IN A NUMBER OF CHANNELS

EVERY MEETING IS A LIVE MEETING, WITH SITUATIONS CHANGING ALL THE TIME

WE WILL REVIEW DEVELOPING SITUATIONS

· IF IT NEEDS TO MOVE FASTER, WE DO IT

· IT IS VERY POSSIBLE THAT WE GO FASTER THROUGHOUT THE YEAR

I BELIEVE OIL WILL FACE UPWARD INFLATION PRESSURES IN THE SHORT TERM

I EXPECT INFLATION TO REMAIN HIGH THROUGH THE MIDDLE OF THE YEAR

DUE TO THE WAR, SUPPLY LINES MAY BE FURTHER PREVENTED

INFLATION IS EXPECTED TO FALL AGAIN IN THE SECOND HALF OF THIS YEAR

INFLATION WILL BE HIGH THIS YEAR BUT WILL BE REDUCED IN 2023

THE ECONOMY IS VERY STRONG AND THERE IS A LOT OF JOB GROWTH

THE FOMC COMMITTEE IS FULLY AWARE OF THE NEED TO RESTORE PRICE STABILITY

THE COMMITTEE RECOGNIZES THAT THE TIME TO RAISE INTEREST RATES AND REDUCE THE BALANCE SHEET HAS ARRIVED

THE ENVIRONMENT IS VERY UNCERTAIN, SO TOOLS WILL BE DEPLOYED

· WE ARE LOOKING FOR MONTH-BY-MONTH INFLATION TO REDUCE

SOME OF THE SHORT-TERM DROP IN INFLATION WILL BE DUE TO SUPPLY CHAIN ​​CORRECTIONS

· RATE INCREASES HAVE BEEN INCORPORATED INTO FINANCIAL TERMS

· Monetary policy is starting to weigh on inflation and growth with a lag; we will see more in 2023 and 2024

· WE HAVE NOT MADE DECISIONS ON FRONT LOADING POLICY TIGHTENING

· IF IT IS DETERMINED THAT IT IS NECESSARY TO INCREASE RATES MORE QUICKLY, WE WILL DO SO

· IF INFLATION INDICATORS SHOW RATES NEED TO RISE FASTER, THE FED WILL

· WE WILL MONITOR INFLATION DATA AS IT COMES IN

WE HAVE THE TOOLS WE NEED, AND WE WILL USE THEM

· WE HAVE A PLAN TO GRADUALLY INCREASE INTEREST RATES DURING THE YEAR

· THE FED WILL ALSO SHRINK ITS BALANCE SHEET TO MAKE SURE THE RISE IN INFLATION DOES NOT SET DOWN

· THE COMMITTEE FEELS STRONGLY COMMITTED TO ENSURE THE RESTORATION OF PRICE STABILITY

WE ARE SEEING PROGRESS ON THE COMMODITY SIDE IN TERMS OF INFLATION

BY THE END OF THIS YEAR, MOST PEOPLE WILL HAVE MEET OR EXCEED THEIR NEUTRAL RATE ESTIMATES

· BALANCE SHEET REDUCTION ADDS TO TIGHTENING

· WAGE GROWTH WILL SLOW

· THE LABOR MARKET IS AT AN UNWORTHY LEVEL

· WE WANT TO SLOW DEMAND TO BETTER ALIGN SUPPLY AND THEREFORE REDUCE INFLATION

· OUR MOVE WILL RESULT IN A TIGHTENING OF FINANCIAL CONDITIONS TO A MORE NORMAL LEVEL

· RISE IN INTEREST RATES WILL LEAD TO SOME TIGHTENING OF FINANCIAL CONDITIONS, BUT THEY SHOULD RETURN TO MORE NORMAL LEVELS

· THE ECONOMY NO LONGER REQUIRES OR DESIRES A VERY ACCOMMODATIVE POSITION

· WE DEMAND THE TRANSMISSION OF POLICIES TO THE REAL ECONOMY

· WE HAVE MADE EXCELLENT PROGRESS ON THE BALANCE SHEET, WE WILL BE ABLE TO FINALIZE A BALANCE SHEET AT THE NEXT MEETING IN MAY

· WE ARE LITERALLY FINALIZING THE DETAILS OF THE BALANCE SHEET

· MORE DETAILS ON THE DISCUSSION WILL BE IN THE NEXT MINUTES

· NOTHING IN THE FRAME MADE US WAIT LONGER THAN WE WOULD OTHERWISE

· THE FRAMEWORK IS ALL ABOUT ANCHORING INFLATION EXPECTATIONS AT 2%

· CHUTES SHOULD IMPROVE, BUT THEY HAVE NOT

· IN THE BASE CASE, STRONG GROWTH IS EXPECTED

THE ECONOMY CAN SUPPORT STRONGER MONETARY POLICY

· THE OBJECTIVE IS TO RESTORE PRICE STABILITY AND MAINTAIN A STRONG LABOR MARKET

CHUTES SHOULD IMPROVE BUT THEY HAVE NOT

THE GOOD NEWS IS THAT THE ECONOMY AND LABOR MARKET ARE ENOUGH STRONG AND CAN WITHSTAND INTEREST RATE INCREASES

· WE ARE DETERMINED NOT TO LET HIGH INFLATION TAKE PLACE; THE WAY WE DO IT IS TO RAISE INTEREST RATES AND REDUCE THE BALANCE SHEET

IT MAY TAKE LONGER THAN WE WISH, BUT WE ARE LOWERING THE PRICES

· WE BELIEVE CAN REDUCE INFLATION WHILE MAINTAINING JOBS

THE GOOD NEWS IS THAT THE ECONOMY AND LABOR MARKET ARE ENOUGH STRONG AND CAN WITHSTAND INTEREST RATE INCREASES

· WE DO NOT SEE A FIRMLY ROOTED WAGE PRICE SPIRAL

SALARY INCREASES ARE FAR ABOVE WHAT IS COMPATIBLE WITH 2% INFLATION OVER TIME

WE EXPECT AS COVID BECOMES LESS OF A FACTOR, PEOPLE WILL RETURN TO THE WORKPLACE

CURRENT WAGE GROWTH IS NOT SUSTAINABLE

In retrospect, we should have moved sooner if we had known what we know now

· WE WILL NOT LET HIGH INFLATION TAKE PLACE, THE COST OF LETTING INFLATION TAKE PLACE IS TOO HIGH

NO ONE WANTS TO HAVE TO IMPOSE RESTRICTIVE POLICIES IN ORDER TO REDUCE INFLATION

· WE WILL CHANGE RATES TO NEUTRAL AS QUICKLY AS PRACTICABLE, AND WE GO BEYOND NEUTRAL WHEN APPROPRIATE

· ALL SIGNS INDICATE AN ECONOMY THAT CAN PROSPER WITH LESS ACCOMMODATIVE POLICY