The FOMC, and particularly Powell, have a difficult task this week, as well as in the weeks and months to come. It’s hard to think of another FOMC meeting before which there has been speculation both that the Fed could surprise to the very hawkish side (accelerate tapering, even end asset purchases outright and lift off immediately) and that it could do so to the other side (perhaps by signaling that financial market moves or geopolitical tensions are giving them pause).
We wrote last week in our FOMC Briefing that we don’t expect either, and our views haven’t changed. Policymakers agree that three rate hikes are likely to be appropriate this year, with the risks tilted to four, and March liftoff fits with that. And markets already believe that, if the Fed’s outlook is realized, the FOMC will follow through. There’s no need for a January surprise to convince markets of that.
First of all, liftoff won’t happen this week. If it were even on the table, we would know,
because there would have been at least some talk of it by policymakers before the blackout on communications went into effect. There was none. A surprise change in balance sheet policy (e.g., ending QE now or another taper acceleration) isn’t out of bounds in the same way that a surprise rate hike is. After all, at the last meeting they accelerated tapering in response to stronger-than-expected data, and since then we’ve had more of the same, specifically the December jobs report. Nevertheless, the cost-benefit analysis is very different than it was in December. Accelerating tapering in December moved up the window for liftoff from June to March. What that, the window’s already where it needs to be. Markets believe liftoff really will happen in March and that more tightening will follow that. A balance sheet surprise risks unnecessarily confusing matters, especially with no updated SEP to aid in interpreting the Committee’s intentions.
On the other hand…
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