Fed full steam ahead and damn the lifeboats

Goldman with the note. It’s full steam ahead for the Fed until the market breaks.

BOTTOM LINE:

Chair Powell said that he was “inclined to propose and support a 25basis-point rate hike” at the FOMC’s March meeting at today’s hearing in the House Financial Services Committee. Powell also suggested that if inflation is stronger than FOMC participants expect, the Committee “would be prepared to move more aggressively by raising the federal funds rate by more than 25bps at a meeting or meetings,” and pointed to the consecutive hiking pace of the early 2000s when discussing the trajectory of rate increases beyond March. On balance sheet reduction, Powell noted that he did not expect the Committee to finalize its balance-sheet reduction plans at the March meeting, but said that he expected the process to take “something like three years.” We expect the Fed to hike seven times in 2022, announce the start of balance sheet reduction in June, and finish it in 2025.

MAIN POINTS:

1. Chair Powell said that he was “inclined to propose and support a 25 basis-point rate hike” at the FOMC’s March meeting at today’s hearing in the House FinancialServices Committee. Powell stated “the economic effects of [the war in Ukraine]are highly uncertain,” but noted that higher energy prices would “push up headlineinflation, and also they’re going to weigh on spending.” He emphasized that the Fedis “going to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain moment.”
2. Going forward, Powell stated that FOMC participants “have an expectation that inflation will peak and begin to come down this year,” but said that “to the extent inflation comes in higher or is more persistently high than that then we would be prepared to move more aggressively by raising the federal funds rate by more than 25bps at a meeting or meetings.” When discussing the pace of increases of the federal funds rate beyond March, Powell noted that “it’s a little bit like the rate hikes that took place in the first part of this century, … [with] rate hikes at every meeting,” while emphasizing that the FOMC hasn’t “made any decisions after [the March]meeting.”
3.Powell said that he did not expect the FOMC to finalize its balance sheet reduction plans at the March meeting, but suggested that it would take “something like three years” for the Fed’s balance sheet to reach its equilibrium size. He also noted that “as we … start to get close to [equilibrium] we might slow down [thepace of runoff] a little bit.” We expect the Fed to hike seven times in 2022, start balance-sheet reduction in June, and finish it in 2025.

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