- Interest rates are unchanged (for now).
- Asset purchases to conclude in March.
- Balance sheet normalization will commence… at some point.
Following the Federal Open Market Committee (FOMC) meeting, the Federal Reserve (Fed) made an official statement.
It contained as many surprises as current interest rates: near zero.
That’s because interest rates will continue to remain in the 0% to 0.25% range. For now. With inflation well over the Fed’s stated target of 2% ‘over the longer run’, the statement confirmed it will ‘soon be appropriate to raise the target range for the federal funds rate.’
Soon, but not just yet.
Meanwhile, the Committee ‘decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March’.
Jerome Powell speaks without actually saying anything
Following the official statement was Jerome Powell’s hotly anticipated press conference, where he cited the effects of the pandemic on an otherwise strengthening job market.
As Ran predicted, Powell also acknowledged the “supply and demand balances related to the pandemic and the opening of the economy”, specifically, that “bottlenecks and supply constraints are limiting how production can respond to higher demand in the near term”, again, exacerbated by the ongoing pandemic.
On the subject of inflation, Powell reiterated the Fed’s commitment to its “price stability goal”, and said that it will be watching carefully “to see whether the economy is evolving in line with expectations”. The Fed will remain “attentive to risks” and is prepared to “respond as appropriate to achieve its goals”.
Or as Will Clemente put it:
Addressing the subject of balance sheet normalization, Powell confirmed the Fed’s intention to begin unwinding in due course, but also failed to provide a timeline. Instead, he said the Committee had “not made decisions regarding the specific timing, pace, or other details of shrinking the balance sheet”. Those would come, he suggested, at some point in the future.
How did the markets respond?
Barely. The S&P 500, Dow Jones Industrial Index (DJI), NASDAQ and Bitcoin are all at levels not seen since this morning.
Bitcoin in particular enjoyed a brief rally (up to US$38.9k) in anticipation of the Committee’s official statement, but the pre-FOMC pump quickly faded.
The Fed has a difficult job to do: cool down an overheated market without over-spooking it. Today was a masterclass in vagueness from Jerome Powell, who managed to speak fluently without saying anything we didn’t know, or wasn’t already priced in. The markets are still uncertain, but for now (at least), no news is good news.