MNI STATE OF PLAY (RPT): Fed Flags Substantial 2022 Tightening

(Repeats article first published on March 17)

Federal Reserve Chair Jerome Powell on Wednesday kicked off a post-pandemic tightening cycle with a quarter-point interest rate increase and signaled a steeper-than-expected climb for rates ahead that would take monetary policy to a neutral setting by next year amid soaring inflation and underlying economic strength.

The FOMC is also close to finalizing its plans for shrinking its balance sheet, Powell said, and could beginning capping reinvestment of maturing assets as soon as its next meeting in May.

The median Fed official saw the fed funds rate rising to 1.9% by December and to 2.8% by the end of 2023 and 2024, firmly within the committee's estimate of the longer run rate of 2%-3%.

Seven out of 16 officials penciled in more than seven 25bp moves in the remaining seven meetings for the year, implying one or more 50bp hikes. But the FOMC hasn't made any decisions to frontload hikes or spread them through the year, Powell said.

"I'm not going to try to give you really specific test for what it would be take to do it. We'll be looking at the data as it comes in. We'll be looking to see whether the data show expected improvement on inflation," he told reporters. "Each meeting is a live meeting and if we conclude it will be appropriate to raise interest rates more quickly, then we'll do so."

RESTORING PRICE STABILITY

The FOMC is determined to do what it takes to "restore price stability" while also sustaining a strong labor market, Powell said. It is reasonably confident it will be able to do so with an economy that's "well-positioned to withstand tighter monetary policy," he said.

But pandemic-related supply disruptions have been larger and longer lasting than U.S. central bankers anticipated and price pressures have spread to a broader range of goods and services. Russia's invasion of Ukraine have driven oil and commodities prices to record highs and will add additional pressure on inflation in the near term.

"The expectation is still that inflation will begin to come down in the second half of the year," retreating to 4.3% by December, Powell said. "We expect inflation to remain high through the middle of the year, begin to come down and come down more sharply next year."

"Monetary policy starts to bite on inflation and on growth with a lag, of course. And so you would see more in '23 and '24," he said.

QT PLANS

Balance sheet reduction could be equivalent to another rate hike on top of the Fed's plans for interest rates, Powell said.

The details of QT are set to be released with the publication of the meeting minutes in three weeks, he said. "The framework is going to look very familiar to people who are familiar with the last time we did this. But it will be faster than the last time, and of course, it's much sooner in a cycle than last time."

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