The first Fed day of 2023
It was certainly a very subdued press conference yesterday and we got no surprises. The Fed raised rates by 25bps (0.25%) slowing the pace of their rate hikes, as widely expected.
What people were hoping for though was a hawkish Fed, and perhaps a replay of Fed Chair Powell at Jackson Hole. It was far from that. There was a bit of confusion but nothing alarming, and the Fed Chair kept insisting that any revisions to their estimates would come after seeing the data at the next meeting in March, when we get the Summary of Economic Projections.
Here are some brief takeaways on the major points and my discussion on the market outlook.
Financial Conditions
One of the most confusing issues was the discussion around financial conditions. It’s been widely discussed that financial conditions have been easing and in fact all the charts suggest exactly that. But, Chair Powell insisted that financial conditions have tightened and he didn’t want to lend any credence to what was happening in the short-term. While I can understand that argument, financial conditions have been progressively becoming looser for some time now.
Rate Hikes
Prior to the conference, the announcement came with its own press release and a of the notable point was:
“ongoing increases in the target range will be appropriate” - note that they discussed multiple increases signifying that they are not done raising interest rates.
During the press conference, he discussed a couple of more rate hikes, alluding to two more before they could pause. They also discussed whether they would take a pause between tightening and that’s not something they are likely to do because they don’t want to pause too soon.
As discussed, any estimates will be revised prior to the March meeting but, the Fed Chair did say that if they have to tighten past 5%, they would. He seemed to suggest that “overtightening” could be a better option given that they have the tools to bring the market back into balance. - This seemed like quite the important and hawkish statement to me.
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