FOMC 2023 0201

The Federal Open Market Committee today announced a 25 bp hike to 4.50%-4.75% in the Fed funds target.

FOMC 20230201

In the context of the entire yield curve, Fed funds in this range seems appropriate. But the Fed has emphasized forward guidance to prevent what it itself has referred to as an unwarranted easing in financial conditions. According to the Fed’s own measure, then, a falling dollar and soaring stocks, amid resurgent commodity prices and continuing labor cost inflation, show this tactic to have produced unwanted results and therefore to have been a failure.

As I predicted Monday, the FOMC has doubled down on its folly.

The Fed therefore should re-examine its misplaced obsession with forward guidance. Deciding what it will do three or four meetings in advance is inherently inconsistent with being responsive to the data. Talk about it is not a binding commitment, and the markets know it. Mere talk has failed to restrain financial conditions and a rational response to this reality would be a change in tactics. If more aggressive rate hikes aren’t called for, stepping up QT has to be on the table.

Treasury securities are a legitimate and neutral monetary asset. Mortgage securities however play favorites with economic sectors, are an incursion into fiscal policy, and so are not. Especially in light of existing concerns, justified or not, about Treasury market liquidity, it’s appropriate to increase runoff of MBS. Should financial conditions tighten excessively, the Fed can always slow the runoff of Treasury securities or even reintroduce purchases. Being open to fine tuning policy in response to evolving data would produce better results with less financial and economic volatility.

What stands in the way? Only the Fed’s rigid doctrine of “transparency”, a mere euphemism for predictability, introduced by former Fed head Alan Greenspan. The ensuing boom-and-bust, inflation-and-deflation, wealth-gap-expanding and debt-addled economy shows this dogma to have failed.

5 thoughts on “FOMC 2023 0201

  1. Bill Terrell says:

    So the policy announcement was as expected. The market response so far has been an additional unwanted easing of financial conditions. Powell will try to negate its weak action with strong words … really, really strong words … in the press conference. It may succeed, on a uhm … transitory basis, but only actual policy will endure. We need a serious Fed. This one is a clown show.

  2. Bill Terrell says:

    The press conference is ongoing, but it’s not clear how much more this reporter can stomach. It’s Powell‘s rambling, dissembling, apology tour. He opens by telling us how deeply the Fed feels the pain of ordinary Americans struggling with inflation, and then simultaneously tries to tell us how strong the Fed’s response is and apologize for how weak it is. Pathetic.

    Contrary to all expectations, including mine, Powell did not attempt to balance weak action with strong talk.

    The first question reflected what everyone wants to know: How does the Fed view the recent easing in financial conditions? His reply was plainly disingenuous. He tried to dismiss it by saying it’s looking at “sustained” financial conditions, then referred to financial conditions as “tightening”.

    To which financial conditions immediately responded by easing further. Stock prices, bond prices, commodity prices, shot up as the dollar went into free fall. At what point, Mr Chairman, does a string of short terms get long enough for you?

    It’s disturbing to watch a man transform himself from one who only months ago vowed not to prematurely let up to one prematurely letting up. From one who channeled Paul Volcker to one channeling Andy Kaufman.

    I have to withdraw my hasty remark about this Fed being a “clown show”. It’s not … it’s very seriously working for Wall Street.

  3. Bill Terrell says:

    So it’s not just me. The presser has concluded and even the Bloomberg and CNBC anchors and analysts are scratching their heads.

  4. jk says:

    bank officers are tightening lending standards, pmi’s are declining, real estate prices are dropping [e.g. the bay area is down 30% of its – admittedly ridiculous- peak]. so there’s some evidence of tightening.

    the fed’s current m.o. of telling nick timiraos what it’s going to do, then doing it so that equities can celebrate is bizarre since the rally is taken as evidence of loosening. they told nick 25bps. if they’d surprised the markets with 50bps equities would not have rallied.

  5. Bill Terrell says:

    Point taken re the declining realty prices … I would say though those are lagged effects of the genuine tightening that took place through the first three quarters of last year, much like the decelerating rate of CPI increase. The lag-free, instantaneous effects are in real time auction markets like those for bonds, stocks, and currencies. The inflation we’re seeing at this leading edge (easing financial conditions in Fed speak) is only beginning to enter the pipeline. It should manifest elsewhere with multiple and variable lags. If the trend continues I’d expect it to begin to stall that CPI deceleration in the coming months.

    For sure the Fed Whisperer strategy is bizarre. Ever since Greenspan started this “transparency” (predictability) kick it’s been all downhill. Predictability itself is a form of ease, since less uncertainty invites speculators to lever up more than they otherwise would given the same actual policy. A gift to the financial establishment at the expense of working America.

    With the element of uncertainty all but gone, the net effect is to require tighter actual policy for the same effect. Lower rates with less foreshadowing could do the same job with less noise.

    Makes me nostalgic for the days when financial wizards parsed financial data for clues as to what the Fed was doing!