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01 Dec, Thursday
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Bull Trader USA

The Fed: Fed’s first interest-rate hike could come in March or May and other key takeaways from Powell’s news conference

The Federal Reserve on Wednesday took giant steps toward scrapping its easy policy stance that was insurance for the economy hit hard by the coronavirus pandemic.

The central bank doubled the speed of tapering of its asset purchases so that they end in March. The central bankers signaled they are in a hurry to start raising interest rates and cleared away obstacles to such a move.

Read: Fed accelerates taper, eyes three rate hikes in 2022

Here are some key takeaways of the meeting from economists.

Avoid the word hawkish

Although the knee-jerk reaction from many was that the Fed is moving in a hawkish direction, Richard Moody, chief economist at Regional Financial Corp, said it was important not to use that word, at least not yet.

“Many are referring to the Committee has having made a ‘hawkish’ pivot at their December meeting, a characterization with which we do not agree. To be sure, the perception of ‘hawkish’ may make ‘hawkish’ a reality for some, but we’ll note that the real Fed funds rate remains significantly negative, the Fed’s balance sheet will top out at around $9 trillion with no sense of the timing of paring it down, and even with the rate hikes implied by the updated dot plot, the funds rate would still end 2024 below the median estimate of the ‘neutral’ funds rate. If all of that constitutes ‘hawkish,’ that term no longer has any meaning in the context of monetary policy,” he said.

March or May for first rate hike

Economists began to debate whether the Fed rate hike — the first since December 2018 — would come in March or May. Ethan Harris, global economist for Bank of America Securities, said he shifted his forecast for the first hike to March from June. Powell hinted that Fed policy would not wait for a full recovery given elevated inflation. Josh Shapiro, chief U.S. economist at MFR Inc, picked May for the first hike. “There are still some unknowns about the pandemic and omicron,” that may delay the first move by six weeks, he said.

Powell hits the sweet spot

 “We believe Powell struck the right tone during the press conference: He was hawkish enough to calm inflation hawks, but not hawkish enough to scare the doves. His performance should deflect future criticism and give the Fed enough policy space to “do the right thing,” said Aneta Markowska, economist at Jefferies. Roberto Perli, head of global policy at Cornerstone Macro, said Powell left the door open “to literally everything.” If inflation subsides, the Fed will give the labor market more time to develop. If inflation remains high, the central bank’s patience will run out.

Stocks pleased by cumulative amount of tightening

Stocks
DJIA,
+1.08%

SPX,
+1.63%

were solidly higher after Powell’s press conference. The Nasdaq
COMP,
+2.15%

finished up over 2%. What gives? Perli of Cornerstone Macro said the stock market likes that the Fed’s projections only show short-term interest rates rising to 2.1% over the next three years. That’s a bit more dovish that the 2.5% rate expected or feared.

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