The Federal Reserve pushed up its benchmark interest rate by a half-percentage-point — the biggest move in over 20 years — and announced the kickoff date for unwinding its $9 trillion balance sheet on Wednesday. Fed Chairman Jerome Powell then talked with reporters for about an hour.
Here are some of the takeaways from Powell’s press conference:
Why take 75-basis-point move off the table?
Reactions ranged from disbelief to incredulity over Powell’s decision to “deep-six” any 75-basis-point rate hikes at coming meetings.
Roberto Perli, head of global policy at Piper Sandler, said that Powell turned his press conference into “an unexpectedly dovish FOMC.” The market reacted forcefully — equities
rallied, Treasury yields
dropped and the yield curve re-steepened somewhat.
Perli said he suspected Powell didn’t mean to be as definitive as the market heard him to be. “He may have meant that 75 bps are not on the table for now,” he said.
Kathy Bostjancic, chief U.S. economist at Oxford Economics, thought it was a bit of an unforced error.
“There wasn’t great harm in having the market expect [a three-quarters of 1 percent move],” Bostjancic said in an interview. Having the market on edge about a big rate hike can be useful, she added, especially as Powell stressed that the Fed wants to expeditiously tighten policy and financial conditions. But instead of being more concerned about higher rates, bonds rallied.
“Maybe he’s trying to thread the needle to achieve a ‘soft landing’ by avoiding an overly rapid tightening of financial conditions,” she said.
Robert Brusca, chief economist at FAO Economics, was puzzled by the focus on a hypothetical 75-basis-point move. He said such a large move has never been part of the Fed’s canon, and former Fed Chairman Alan Greenspan only did it once after he skipped a rate hike due to pending elections.
It is like vowing not to get hit by a meteorite, he said.
As a result of Powell’s comments, two 50-basis-point hikes are coming in June and July, economists said.
Powell going for the ‘front page of USA Today’
The Fed chairman opened his press conference saying he wanted “to speak directly to the American people” and said “inflation is too high.”
“We understand the hardship it is causing and we’re moving expeditiously to bring it back down. We have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses,” Powell said.
The message? “We’re in this together and ‘I feel your pain,’” said Vincent Reinhart, a former top Fed staffer.
Reinhart said the Fed tailored its communication, wanting “something for the front page of USA Today. It is a recognition by the Fed that inflation is becoming a political problem.”
Balance sheet wind-down is a sideshow
Powell made clear that Fed officials believe the winding down of the assets on its balance sheet is a sideshow, Reinhart said.
He noted that Powell essentially shrugged when asked about how many quarter-point rate hikes would be the equivalent of the Fed’s plan to allow $1 trillion to run off its balance sheet every year.
The Fed didn’t even set a target for how many assets it wants to sell. BofA Global strategists estimated the plan will result in a nearly $3 trillion reduction in its record size over the next three years.
What is neutral? We’re not saying
Powell again stressed that the Fed wants to get its benchmark interest rate up to “neutral,” where it is not boosting inflation. But he refused to be drawn into giving a precise estimate of what a neutral Fed funds rate would be now that core PCE inflation is running at a 5.2% annual rate.
“There is not-bright line you’re stepping over,” he said.
The Fed’s published estimate of “neutral” is only valid when inflation is running close to the Fed’s 2% target.
Powell said that neutral “is a concept” and “not something we can identify with any precision.”
Hawks outside the Fed don’t have much trouble estimating neutral, seeing it much closer to 5%-6% than 2%-3%.