The highly anticipated Federal Open Market Committee (FOMC) meeting ended up having very little surprises. There are no changes to the fed funds rate which was expected. The FOMC also signaled its tapering of quantitative easing (QE) purchases would conclude at the end of March which would also correspond with the first rate hike; both of which were also anticipated. It also stated that it expects balance sheet runoff (i.e., quantitative tightening or QT) to occur sometime after the first rate hike, with the primary mechanism to accomplish this to be via maturities versus outright sales. Otherwise, the FOMC was relatively quiet on providing additional insight into how quickly and how far it intends to hike rates, when it will start winding the balance sheet down, how fast it will let the balance sheet shrink, and the total size of the reduction.
In many regards, this isn’t surprising. The FOMC has historically opted to retain its flexibility on monetary policy versus painting itself into a corner and commit to a pre-defined path. Fortunately, the FOMC (and Jay Powell at his presser) didn’t come off as being more hawkish than the market expected. Unfortunately, he didn’t rule out the FOMC being more hawkish, either. This means the market is free to climb the wall of worry about just how hawkish the FOMC will be in the coming days/weeks—at least until FOMC speakers can come out and help the market re-calibrate.
We came into the meeting believing the FOMC would hike in March (check), QE would end in March (check), QT would begin in June or July (TBD), and hike three, maybe four times this year (TBD). Nothing we heard today dissuades us from those opinions, but we will have to see if individual committee members’ public comments indicate consensus is more or less hawkish than what the market is pricing in. We believe elevated levels of volatility could persist across all market sectors until the FOMC solidifies its future plans and is willing to telegraph those plans to the market.
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