March 14, 2022
By Theresa Sheehan, Econoday Economist
The FOMC has an unenviable task of trying to guide monetary policy through a period of turbulence. The March 15-16 meeting will be pivotal to communicating its present actions and setting the tone for the future.
In some respect the leanings of individual policymakers will matter more than usual. Speaking for the FOMC, Chair Jerome Powell has confirmed the next move now that asset purchases have ended will be a hike in interest rates – a virtual certainty at the next meeting – and that the FOMC is discussing the best way to predictably reduce the Fed’s holdings of securities – mainly through cutting reinvestments – once interest rates have been raised. How to accomplish the latter is still under discussion and should be settled at the next meeting or two. The implication is that the timing of reductions in the balance sheet is probably going to be sooner rather than later.
Powell stated his personal preference for a 25-basis-point increase in the fed funds target range at the March meeting, but this shouldn’t be read as a promise for the actual outcome. The decision will be made by the FOMC as a whole and geopolitical events are developing rapidly. There may be good reasons to change direction on monetary policy by then – either to hold off on removing stimulus or to pick up the pace in removing accommodation.
At the moment, there are three vacancies on the board of governors and three nominees in limbo while Republicans and Democrats argue about the qualifications and suitability of the three candidates. The Senate Banking Committee has yet to issue its recommendations and none of the names have been put forward for a vote by the full Senate. This means that the board will have only 4 of 7 votes to cast on policy. Governor Michelle Bowman is open to as much as 50 basis points, as is Governor Christopher Waller. Governor Lael Brainard is probably more inclined to a smaller increase.
District bank presidents with votes in 2022 are John Williams (New York), James Bullard (St. Louis), Esther George (Kansas City), Loretta Master (Cleveland), and Patrick Harker (Philadelphia, voting as alternate for Boston). Recent comments from all of these indicate that they would back at least a 25-basis-point increase. Comments from Bullard and George suggest 50 basis points might be their preference, and Mester could be in this camp as well.
Of the 9 voters, as many as 5 could prefer a 50 basis point hike at the next meeting. Powell will have his work cut out for him to achieve consensus. I anticipate at least one dissent in the vote.
Now that we are in the communications blackout period around the FOMC meeting (midnight March 5 through midnight March 17) we won’t get any fresher indication of their thinking, individually or collectively. Based on currently available information, the decision at the FOMC could be unusually fraught. On the employment side of the dual mandate, all the data point to full employment and continued demand for workers with wages, albeit rising, now rising somewhat more slowly. On the price stability side, the inflation data through February suggest that the Fed needs to act aggressively to cool demand even if lifting rates doesn’t help much on the supply side. Soaring energy costs are not going to improve this outlook. The FOMC will also have in mind preserving its credibility as an inflation fighter. The spirit of Paul Volcker may well be invoked.
The decision will have to be made against a backdrop of increased risks and uncertainty as the war in Ukraine drags on and there are disruptions in financial markets and supply chains for major commodities. Assessing how much of the global impact will be felt in the US economy is a tough call, even if the conflict ends soon, which may or may not be the case as negotiations have been difficult.
On the plus side, the Covid pandemic seems to be fading into a more manageable endemic. Variants are still emerging but as Powell as noted, successive waves are having increasingly limited impact on economic activity and individual behavior. Strains on the healthcare system are not over but could be improving.
The meeting outcome is a hard call and will be so until the last minute of the vote. There are reports coming out over the next few days that will influence policymakers’ thinking. None will be more important that the retail and food sales numbers for February at 8:30 ET on Wednesday, March 16, the day the FOMC votes.
The statement that the FOMC will release at 14:00 ET on that Wednesday will need to be carefully crafted to balance the available data against economic developments. The next statement could well be a significant evolution from the one released on January 26. It would be no surprise if a version of forward guidance were reintroduced for the expected path of rates with caveats about the risks.
In the end what may be of most interest is the release of the FOMC’s Summary of Economic Projections (SEP). There’s potential for significant revisions in expectations for growth, employment, and inflation in the remainder of 2022 and into 2023. The expected path of the fed funds rate could also be more aggressive. However, there may also be greater variation in the range of forecasts by individual policymakers, reflecting the greater uncertainty. Powell’s press briefing is likely to include a grilling on the forecasts where he will try to reinforce that these are estimates and, for rate projections, not hard promises for future policy.