Stepping on the brake with one foot while putting an arm around the baby to keep her from hitting the dashboard.
By Wolf Richter for WOLF STREET.
The FOMC raised its five policy rates by 25 basis points, bringing the upper end of the range to 5.0%. The Fed has now hiked by 475 basis points in 12 months, far more than anyone had publicly imagined a year ago. The vote was unanimous. It hiked:
- Federal funds rate target to a range between 4.75% and 5.0%.
- Interest it pays the banks on reserves to 4.9%.
- Interest it charges on overnight Repos to 5.0%.
- Interest it pays on overnight Reverse Repos (RRPs) to 4.8%.
- Primary credit rate to 5.0% (what banks pay to borrow at the “Discount Window,” part of the liquidity support for banks).
Further rate hikes are likely, according to the statement: “The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”
The phrase on the last statement, “ongoing rate increases will be appropriate,” was replaced by “some additional policy firming may be appropriate.”
QT will continue on track, with the Treasury roll-off capped at $60 billion per month, and the MBS roll-off capped at $35 billion a month, same as in the prior months.
The “dot plot.”
Four times per year toward the end of each quarter, the Fed releases its “Summary of Economic Projections” (SEP), which includes the infamous “dot plot,” The last SEP was released at the December meeting. Today, the Fed released its updated SEP.
The median projection for the federal funds rate at the end of 2023 remained at the projections from December, at 5.125%: One more rate hike in 2023, to a target range for the federal funds rate between 5.0% and 5.25%.
No rate cut in 2023, same as the December dot plot.
But seven of the 18 participants saw a rate of 5.375% or higher at the end of 2023, with four of them seeing 5.625% or higher:
1 expects: 4.875%
10 expect: 5.125% (median)
3 expect: 5.375%
3 expect: 5.625%
1 expects: 5.875%.
They raised this terminal rate at each of the SEPs since 2021. This was the first SEP that did not raise the projected peak rate, but kept it at 5.125%.
The new regime: Tightening monetary policy while providing liquidity support for banks.
By hiking rates and continuing QT while simultaneously providing liquidity support for the banks, the Fed made a clear distinction between monetary policy (rate hikes and QT) and liquidity support. And the Fed will be doing both at the same time.
This distinction between monetary policy and liquidity support is the new regime among central banks.
The ECB, at its meeting last week, said that there’s “no trade-off” between fighting inflation (monetary policy) while providing liquidity to the banks, if needed. It hiked by 50 basis points and promised to provide liquidity to the banks, if needed.
They’re following the Bank of England which last fall provided liquidity support to the gilts market that had threatened to go into a death spiral under the pressure from pension funds facing margin calls over the infamous LDI (liability-driven investment) strategies that were imploding due to the surge in long-term yields. The BOE bought some long-dated bonds, which calmed down the gilts market and gave pension funds breathing room to clean up the mess. In November, it started selling those bonds it had bought in September and October. By January, it had sold all of them. And the tightening of monetary policy continued with rate hikes and QT. That was a pretty slick demonstration of how to pull off this new regime.
This new regime of tightening while providing liquidity support to the financial sector is like a driver in the good old days stepping on the brake with one foot and putting an arm around the baby to keep her from hitting the dashboard.
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