While the Fed is now ‘flexible’ in how it approaches this rate hike cycle and the run off of the balance sheet, they barely changed their assessment of the economy. They repeated “that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Job gains have been strong…Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier last year.” This is all similar to what they said in December.
They tweaked the comments on inflation. While repeating that inflation is around 2%, they said “Although market based measures of inflation compensation have moved lower in recent months, survey based measures of longer term inflation expectations are little changed.”
They codified in the statement that “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”
With respect to the balance sheet, “The Committee is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments. Moreover, the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.” This came after they said that an “ample supply of reserves” will be needed and that “ensures that control over the level of the fed funds rate…”
Bottom line, being patient with the fed funds rate makes perfect sense but to cite “financial developments” as the reason when it’s the rate hikes and QT that cause the “financial developments” is still reflective of a committee that continues to chase its own tail.
On the balance sheet, it is only about 10% smaller than its peak level after quintupling since 2007. That they are already getting cold feet because the market doesn’t like it is a threat to their credibility. That said, there was no numbers in the statements that reflect where the size of the balance sheet will end up because they don’t really even know anyway.
So, we have the FOMC saying the economy is solid but they are getting stuck at a fed funds rate at only 2.25-2.50% and QT is no longer watching paint dry. The Fed is thus trapped in a never ending tone of easy money, along with others.
Now that financial conditions are now easing, what’s the FOMC going to do in March?
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor.