Ecoinometrics - The Fed speaks

FOMC meeting, February 2023

No game changer came out of the FOMC meeting. We got the rate hike we expected and Jerome Powell said all the right words. So where are we going from here?

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The Fed speaks

The Federal Reserve has only three ways to influence the financial markets and the economy at large:

1. They can set the level of the Fed Funds rate.

2. They can buy and sell assets with money printed out of thin air (Fed balance sheet).

3. They can talk about doing (1) and (2).

When it comes to the impact on the financial markets of the decisions coming out of the Federal Reserve (3) is as important as (1) and (2). How the markets react to the Federal Reserve depends on two things:

• What is the Federal Reserve signalling.

• How compatible is it with the real economic data. 

In an era dominated by the power of central banks you can't just ignore monetary policies and forward guidance when making investment decisions. So let's break it down.

What they said

Here are some quotes from the press conference that followed the FOMC meeting on February 1st. 

"It is important that overall financial conditions continue to reflect the policy restraint that we're putting in place."

"It is our judgment that we're not yet at a sufficiently restrictive policy stance."

"That disinflationary process that you now see underway is really at an early stage." 

Fed Chair Jerome Powell

That's just a sample of what was said at the press conference but the theme is the same pretty much everywhere: the Federal Reserve will continue to run a restrictive monetary policy until inflation is unequivocally on a trajectory to reach 2%.  

If you were waiting for a pivot we clearly aren't there yet. Not explicitly. Not implicitly. As we have discussed last month we aren't at the pivot phase, for now we are at the inflection phase: smaller rate hikes and convergence to a stable rate is what we'll get this year.

Of course a lot of investors are already anticipating that after the inflection comes the reversal. But given the uncertainties on the timing and extent of the coming recession for the US economy it seems premature to start betting on the pivot now. 

We will be able to do a more in depth text analysis after the minutes of this FOMC meeting are released. But for now if we stick to the transcripts of the press conference we can observe the following.