The Federal Open Market Committee today announced a 75 bp hike to 3.00%-3.25% in the Fed funds target. It’s solidly in line with expectations.
We can always quibble. We’d have preferred 125bp. The Fed has said it wanted to front load rate hikes, recognizing that more sooner would mean less overall. A shock and awe move would save a protracted water torture, possibly being more uncomfortable in the short run but ending the discomfort sooner. To add another metaphor, we can rip the BandAid off quickly or tear it off slowly. But putting it into perspective, three consecutive 75 bp hikes would itself have been considered shock and awe mere months ago, so maybe we’re being a bit greedy.
Let’s see how this plays out in markets over the next few weeks. If asset prices meaningfully decline, we will take that as early evidence that sufficient relief is in the pipeline and the Fed’s battle against skyrocketing consumer prices is being won. Conversely, if it’s off to the races again, more work will have to be done. Fortunately Powell appears to realize this, and based on the past few months, has earned the benefit of the doubt.
Seemingly paradoxically, firm action on the short end of the yield curve will ultimately bring rates lower on the longer end. Provided Treasury is smart enough to take advantage of it, this could bring relief on the fiscal front. Unfortunately Yellen has not earned the benefit of the doubt.