FOMC: Are We There Yet?

BOSTON, MA, February 1, 2023 — The Federal Open Market Committee (FOMC) met today for the first of eight times in 2023 to assess the state of the U.S. economy and monetary policy.

What We Learned

The FOMC raised the Federal Funds Target Rate (fed funds) by 25 basis points (bps), a well hinted reduction from the previous 50 bps hike at the end of 2022. The target band now stands at 4.50-4.75%. Markets largely expected the downshift, as inflation indicators appear to be moving further away from the high prints of last summer. Many market participants see this as evidence that the aggressive rate hikes of last year are beginning to slow the economy with the Fed eventually pausing their tightening strategy.

  • The market currently reflects a high probability of a 25 bps fed funds increase at the next FOMC meeting on March 22nd.
  • The market sees a peak fed funds rate of around 4.90% in early 2023 and then a quick reversal with fed funds at 4.25-4.50% by year end.
  • The Fed continues to normalize its balance sheet via Quantitative Tightening (QT) at the previously stated maximum monthly cap of $60 billion of U.S. Treasury securities and $35 billion of agency mortgage-backed securities. QT reduces excess money supply and excess market liquidity.

The FOMC anticipates that “ongoing increases” in the fed funds rate will be appropriate. To maintain policy optionality and flexibility, the statement notes that the Committee “will consider the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” Chair Powell emphasized the need for further hikes at the press conference. Even though the Committee is seeing improvement in goods inflation, non-housing related inflation (i.e., labor) remains elevated and requires attention. Thus, the terminal rate of the fed funds rate and how long the Committee maintains that terminal rate are the two important questions that remain unanswered and subject to incoming economic data and financial conditions.

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