FOMC 2023 0322

The Federal Open Market Committee today announced a 25 bp hike to 4.75%-5.00% in the Fed funds target. 

FOMC 20230322

In the context of the entire yield curve, Fed funds in this range seems appropriate. The main risk coming into this meeting was that the Fed would throw the average American under the bus to make life easier for the financial elite by granting the “pivot” Wall Street lusts for. Crises popping up in the banking sector like weeds could have been grasped as an excuse.

As for the latter, banking regulators asleep at the switch is the core problem the Fed needs to address. It can cope with the immediate problem with targeted tools like the discount window and other means of lending directly to stressed banks. It can address the longer term problem by raising bank reserve requirements and better regulating banks. It’s not necessary to wave the white flag on the single biggest economic problem faced by ordinary Americans, the rapidly deteriorating value of their money.

The Fed’s QT program proceeds apace. While many analysts rightly point out that emergency bank lending is an offset to QT – a back door QE – that puts undue focus on transient changes in the size of the Fed’s balance sheet, and overlooks the composition of the Fed’s assets. This is consistent with the kind of flexibility and data dependence we’ve called for before.

But as we’ve also noted before, the overall effect of Fed policy on the course of inflation can easily be gauged in real time from financial conditions. In particular, if stock prices are rising, money is too easy. The Fed call worked admirably last year; there’s no reason to abandon it now.

Meanwhile it’s abundantly clear that Financology’s criticism of the Fed’s attempts to rely on “forward guidance” is being further vindicated. It clearly did not foresee the recent spate of bank failures, which have made a mockery out of hawkish guidance just a couple weeks earlier. Can anyone seriously claim that the Fed could know today what monetary policy settings will be appropriate at the time of the next FOMC meeting in May? As I’ve said time and again, the only realistic option is to evaluate the data that are known at the time, respond appropriately, and stop talking about what you’re going to do in the future.

The Fed also needs to take off the blinders and broaden its range of tools. It cut the required reserve ratio for depository institutions to zero on March 26, 2020, and left it there. Not possible this has weakened the banks? All through this banking crisis, I have not heard even one attempt in the financial media to defend this.

5 thoughts on “FOMC 2023 0322

  1. Bill Terrell says:

    The initial reaction of markets to the announcement and Powell’s ongoing press conference has been to interpret it all as dovish. The dollar declined against other currencies, against stocks, against future dollars (bonds), and against commodities, including key copper and gold. If sustained, this will inevitably be followed by the dollar declining against goods and services. In other words, the rising prices we first see in real time asset markets we will see later in consumer markets.

    I don’t agree with that interpretation. Having read the same statement and heard the same words from Powell as everyone else, there was nothing dovish about it. Apparently the market took the change in language about “ongoing” tightening being appropriate to “may” merit additional firming as a “pivot” signal. It’s a failed Rorschach test … the market – especially the stock market – has been so eagerly watching for pivot signals it will find them even where they aren’t.

    Madness of crowds. Powell is clearly saying they just don’t know what action will be required going forward. They’re trying to backpedal out of their foolish “forward guidance” rut, as I have long been urging. Powell carefully explained that the recent banking turmoil may spur tighter lending standards and pinch hit for some amount of rate hiking, but that it’s not possible to anticipate by just how much: “We’ll just have to see.”

    Maybe the markets will reconsider once they’ve more carefully digested what actually was said.

    1. Bill Terrell says:

      Since my last comment markets apparently have reconsidered their initial response in favor of a more sober assessment of the Fed’s position. Stocks ended the session sharply lower. The dollar was more mixed in the broader markets. Bonds and gold remained higher. Bonds are a bit more of a double edged sword though … higher rates from the Fed do not necessarily mean higher yields … to the extent the bond market is confident the Fed will stand firm against inflation and support the dollar, bond buyers can demand less yield and will pay more for a given expected future cash flow. As a bond alternative, gold often shares directional cues with treasuries.

  2. Bill Terrell says:

    It’s the day after the Fed announcement and the media are full of sensationalistic reporting about a Fed “pivot”, that the Fed has signaled the end of its rate rising campaign, etc. The Fed did no such thing. Wall Street is apparently so desperate for a “pivot” it will manufacture one from nothing.

    This wouldn’t be the first time. It ginned up a big rally in stocks last August on a supposedly dovish turn from the Fed only to have it crushed when Jay Powell spoke at Jackson Hole. Less dramatic instances have occurred since, but it has become a repeating pattern.

    There is something different this time though. The bond market has been cutting rates. This does in fact foreshadow eventual rate cutting by the Fed, but it will be the bond market leading the Fed, not the other way around, as I discussed more fully in Interest Rates Cut. As of now the Fed is still exerting upward pressure on rates.

    Furthermore, a decline in short rates is not the bullish omen Wall Street media would lead you to believe. In 2018 it kicked off a one year stock rally, but in 2000 and 2007 rate declines heralded major bear markets in which stock prices were cut in half. Before you buy into Wall Street’s sales pitch, ask yourself what kind of conditions would prompt rate cuts at a time when even official inflation data are well above the Fed’s target.

  3. shiny! says:

    Thank you so much, Bill. I’ve nothing to add but sincerely appreciate your insights.