Whether it was Chair Jerome Powell’s preference or not, the first post-FOMC meeting press briefing was mostly about the Fed’s balance sheet and how the Fed intends to proceed with normalization. I expected it to dominate the Q&A period before the meeting, but the issuance of a statement regarding normalization and a reaffirmation of its “Longer-Run Goals and Monetary Policy Strategy” meant that there was little attention for anything else.
The first meeting of the year is the one at which a number of housekeeping tasks are performed like confirming the Chair and Vice Chairs of the Committee. The reaffirmation of the longer-run goals included only a minor change in the form of “an updated reference to the median of participants’ estimates of the longer-run normal rate of unemployment in the most recent Summary of Economic Projections”. The statement on normalization presented no material change in this policy, but highlighted that it could change if necessary. Chair Powell indicated the statement was issued to ensure clear communication of the FOMC’s thinking at present.
Powell’s opening remarks included a few points that indicate progress on determining future balance sheet policy. He emphasized that no final decisions have been made. However, his remarks suggested that it is more likely policymakers have determined that future monetary policy will be conducted along a “floor or abundant reserves system” rather than returning to the previous corridor of rates. He noted that the FOMC “strongly believes the floor system provides good control and effective transmission” of monetary policy. Ultimately the size of the balance sheet will be determined “after allowing for currency in circulation” then the Fed’s large holdings of securities will constitute “a buffer that does not require frequent sizable market interventions” that will be “far larger” than before the financial crisis.
Powell also indicated that the FOMC is “now evaluating the appropriate time for the end of the run off” and is expected to finalize it in “coming meetings”. He indicated that the reductions in the balance are now expected to wind up sooner than previously thought. He noted the Committee is “willing to make changes as we learn about the process” of unwinding or in response to a need to provide accommodation. He said the FOMC “will not hesitate to make changes in light of developments” in the economy. He added, “We recognize that the economy could present conditions where the fed funds rate is not sufficient” to respond even as it remains the primary tool of monetary policy.
Powell said the Fed is committed to “clarity and predictability” in setting rates and the size of the balance sheet. He said, “We think that our policy stance is appropriate right now” even as the fed funds rate is “in the range of the Committee’s estimates of neutral.”
The Chair said the FOMC had an “extensive discussion” of the base line for the economy and the risks it faces. Monetary policy will be used “to offset risks to the base line”. He said the “cross currents” from the global economy “are going to be with us for a while”. At present, “there is no need to change” rates and “no rush to judgment”. Whether the current cycle of rate hikes is at an end, Powell said that will only be known “in hindsight”. He anticipated that if there is drag to first quarter growth from the recent partial government shutdown, it should be made up in the second quarter unless another occurs after the February 15 expiration of the funding agreement.
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