Fed stays the course
January 28, 2021
Source: Federal Reserve Board of Governors
The FOMC left policy unchanged as expected yesterday. The statement was largely in line with that put out last month, indicating again that rates will be held steady until maximum employment and an inflation rate moderately in excess of 2.0 percent have been achieved and that asset purchases will continue at the current pace until “substantial further progress” toward these goals has been made. Jerome Powell struck a similarly dovish tone in his post-meeting press conference. There remains nothing to suggest that policymakers are wavering from their outlook that benchmark rates won’t be lifted for at least three more years.
There is still a bit of a disconnect, then, between the Fed’s guidance and market expectations, which are pricing in rate hikes in 2023. Moreover, it is to be expected that those expectations will be pulled forward at least temporarily when economic growth surges in the wake of the pandemic and the inflation rate resets. But while the market has historically been more prescient than the Fed itself in anticipating rate cuts – recall that the easing moves in 2019 were priced in well before the FOMC signaled them, for example – policymakers have been much more steadfast when they have pledged to refrain from tightening. In fact, the last time the Fed truly surprised the market on the hawkish side was all the way back in the 1994-95 cycle, when both the timing and the magnitude of rate hikes were more aggressive than had been anticipated. That episode now serves as a cautionary tale for the bank, as its unexpected nature contributed greatly to what was at the time the largest municipal bankruptcy in U.S. history (Orange County) and a major international currency crisis (the Mexican peso crisis). Since then, the Fed has telegraphed its tightening cycles much more explicitly, as reflected in the relatively muted increases in long rates during these periods. The best bet remains that pockets of unemployment and structural disinflation will keep rates on hold until at least 2024 as the FOMC currently estimates, but it is a near certainty that any deviation from that timetable will be flagged well in advance
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What occupation accounted for the greatest share of manufacturing employment in the U.S. at the end of the Industrial Revolution?