The Federal Reserve on Wednesday approved a quarter-percentage-point hike in interest rates to a range of 4.5%-4.75%. That was the smallest rate hike in a year, and one that had been telegraphed by many Fed officials. In addition, the Fed’s statement left in language that it saw “ongoing increases in the target range” — which means more than one hike is still planned.
This was a fairly hawkish setup for Fed Chairman Jerome Powell’s press conference, which followed a half hour after the policy move was announced.
Read: Fed lifts interest rates, foresees only ‘couple more hikes’
Powell’s comments resulted in easier financial conditions, reflected in lower bond yields TMUBMUSD10Y, 3.523%, higher equity prices DJIA, -0.38% SPX, -1.04% and a weaker dollar DXY, +1.22%.
Here are four takeaways from the question-and-answer session:
Powell resists locking horns with the market
Against the expectations of many, Powell did not repeat his previous concern about easy financial-market conditions.
“Financial conditions have not changed much since our December meeting. We’re just going to have to see how fast inflation comes down. Our forecast is that it will take longer to achieve and we’ll have to keep rates higher for longer, but we’ll see,” Powell said.
In an interview, Carl Tannenbaum, chief economist at Northern Trust, said he sensed Powell’s language “was a little bit less strident than he had been in December, when I think he almost sounded annoyed that credit conditions had eased and he almost sounded like the markets were working at cross purposes.”
Derek Holt, head of capital market economics at Scotiabank, said Powell’s answer “was far short of having much conviction in your own forecast, and markets seized on the moment.”
Holt, who thinks fighting inflation is a long game, said Powell’s lack of conviction might have been deliberate in terms of his views or greater uncertainty on the market, or perhaps not his best performance.
“My general impression is that recent illness notwithstanding, he left his ‘A’ game behind back in December,” Holt said in an email to clients. Powell came down with COVID last month.
A rate hike in March seems like a sure bet, but after that, all bets are off
Powell’s comments at his presser led economists to believe that another quarter-point hike in March was a done deal.
“March is pretty certain,” said Joseph Gagnon, senior fellow at the Peterson Institute for International Economics, in an interview.
If the inflation data continues to improve by May, then the Fed might pause
On the other hand, if the data “is mostly good,” they will do a hike at the May 2-3 meeting, Gagnon added.
Michael Gapen, U.S. economist at Bank of America Securities, agreed.
“Today’s FOMC communication raise a distinct risk that the Fed hikes once more in March and pauses at a target range of 4.75%-5.0%,” Gapen said, in an email to clients.
Tannenbaum of Northern Trust said that he thought Powell’s personal forecast might be for two more rate hikes. However, Tannenbaum thinks the Fed might stop after the next move in March.
Powell ducked a question about whether the Fed talked about the conditions that needed to be in place for a pause in rate hikes, saying that reporters should wait for the minutes of the meeting in three weeks.
Holt said “that kind of comment is flagging the risk that they did indeed discuss a potential pause, arriving at some point, and so we will closely watch the minutes.”
A sense of relief that inflation is starting to go the Fed’s way
Many economists said their main takeaway from the minutes was a sense of relief at the Fed that inflation is starting to move lower.
“Powell sounded decidedly less hawkish than he has in a long time,” said Aneta Markowska, economist at Jefferies, in an email.
“Their inflation forecast isn’t being constantly blown out of the water on the high side. That’s something they are probably very happy about,” Gagnon said.
Powell didn’t pound his shoe about the forecast of no rate cuts this year
Fed officials stressed in the minutes of their December meeting that none of the 19 top officials were projecting any rate cuts this year.
But the market has been pricing in two cuts by the end of the year.
In his remarks, Powell seemed to open the door for rate hikes this year, economists noted.
“I don’t see us cutting rates this year, but if we do see inflation coming down more quickly then that will play into our views. We’ll have to see,” Powell said.
Tannenbaum said Powell was taking a measure of satisfaction that the trend is heading in the right direction.
There was a point where the Fed no longer trusted its forecasts for inflation, he said.
This article was originally published by Marketwatch.com. Read the original article here.