The Federal Open Market Committee today announced a 25 bp hike to 5.00%-5.25% in the Fed funds target.
In the context of the entire yield curve, Fed funds in this range is high. The Fed’s balance sheet remains far out of whack with historical trends, as discussed more fully in Fed Preview, indicating the FOMC is putting too much reliance on its Fed funds target and not enough on trimming the balance sheet and raising reserve requirements. It’s hard to anticipate where this experiment in unbalanced policy will lead.
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 have known in January what monetary policy settings would be appropriate today? 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 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.
Markets are intensely focused short term. The rate decision itself is pretty much non-news. It’s widely expected that this will be the last rate hike of the cycle, and markets will seize upon any shred of evidence in today’s announcement as confirmation. History doesn’t support this view … you only know which was the last hike when the cutting cycle begins. But no matter … Wall Street wants to sell stocks and always shapes the narrative in its captive media to suit. Don’t count on the initial stock market reaction as an indicator of what lies ahead.