FOMC Reaction - January Update

Fed statement side-by-side comparison

Fed sets the stage for hiking to begin at their next meeting, March 16

At its meeting today the FOMC voted unanimously to maintain the Federal Funds rate at 0-0.25% and to finish tapering in early March.

Some market participants speculated that the FED might raise interest rates by 0.50% in March. This meeting dispelled that notion.

The FED noted the impact of the Omicron variant on COVID-sensitive sectors like travel, but anticipates a short wave of infection and, as a result, muted economic impact.

Messaging at the press conference:

At the press conference, Chair Powell focused on the backdrop of elevated inflation and a strong labor market.

Chair Powell focused on wage gains and muted labor supply due to retirements, caregiving needs, and people out of work because they are sick.

Chair Powell noted that bottlenecks in supply chains are limiting the ability of supply to move higher in response to stronger demand.

Chair Powell noted that the FED will be led by the incoming data and evolving outlook and that it will need to be humble and nimble. He declined to precommit the FOMC to any particular policy adjustment path.

Market reaction:
Stocks initially popped higher upon the release of the statement, but as the press conference continued, drifted lower.

Rates are up 1-7 bps across the curve, mostly moving higher as the press conference unfolded.

Our takeaways:
There were no major surprises today.

The FED neither capitulated to recent market volatility, nor overreacted to recent inflationary trends.

A reasonable base case expectation for 2022 seems to be 0.25% hikes in March, June, September, and December. Quantitative tightening will most likely begin in May.