Comment by Rick Rieder, BlackRock
Rick Rieder: "The meeting of the Federal Reserve’s Federal Open Market Committee (FOMC) witnessed another historic 75 basis point (bps) increase to policy rate levels (to a range of 3.0% to 3.25%) in an effort for the central bank to manage its number one priority: fighting persistently high inflation. The Fed, including in today’s meeting statement and in the Chair’s press conference, has been clearer than arguably any central bank in identifying its current goal and moving interest rates and liquidity provision to achieve it. Indeed, by moving the Fed Funds rate for the third time in 75 bps increments we see clear evidence of a strong desire by the Committee to temper demand as a way to achieve its goal of price moderation."
"Moving from quantitative easing (QE) earlier this year to quantitative tightening (QT) in recent months, while also moving the Funds rate in 25, then 50 and now 75 bps increments displays an impressive resolve and a commitment rarely seen at the central bank since the days of Chairman Paul Volcker. Moreover, we have received as clear a set of communications surrounding these moves, as any time in recent memory – and we heard little different today in the Fed’s statement, the Chair’s press conference and the Summary of Economic Projections (SEP), including the “dot plot.”
"The question today, then, becomes how close are we to a policy resting place, whereby the Fed could wait for restrictive policy to work its way through the economy over coming months, allowing the now famous “long and variable lags” to tamp down inflation? That terminal rate plateau seemed much closer at hand a couple of weeks ago, before the last CPI report where inflation stayed considerably higher than many anticipated. As such, the August CPI report was a watershed moment for markets, and probably for the Fed, in terms of evaluating the momentum of inflation improvement, making subsequent reports increasingly relevant to understanding the policy path."
"A number of other concurrent indicators, including commodity prices, freight costs, higher inventory levels in some arenas, all suggest some near-term inflation improvement. Yet, the Fed has to see that come through before changing its near-term battle against higher prices. Hence, the markets and the Fed will be tuned into the upcoming data, but will also keep one eye very clearly directed toward the labor market, to see if the Fed’s actions are starting to impact employment demand. Thus far, the impact on employment by monetary policy appears to have been minimal, but the employment reports over the next several months will be major events for the markets and the Fed, to see how these rate (and liquidity) efforts are pulling demand out of the employment market."
"As a result of the slowdown in economic growth, the question is now coming closer to the fore as to when the economy will become “Fed Up,” with higher interest rates and tighter liquidity and begin adjusting demand relative to these much tighter monetary conditions. As described, the economy tends to act with long and variable lags, and with much longer lags than markets do. In fact, markets react quickly, aggressively, and often-times overshoot economic fundamentals.
The risk to the economy today is that of a Fed that overtightens policy from here, without allowing for the time required for a very large, broad and flexible economy to adjust to these new levels of interest rates and money flowing through the system. The Fed’s statement, and the Chair, told us again in a very clear way that more restraint is required, but can the system handle more restraint from here? Probably, and the Fed SEP suggest it will have to, but it will likely require markets to continue adjusting as they should."
"The coming weeks and months will be very important for evaluating how the real economy adjusts to policy adjustments. Historic fiscal stimulus infusions have come through the system, with more coming, and hence the lags can take longer to see than would have been the case in the past. We think the Fed will move another few times from here, with the data determining the veracity of that and how much longer they will have to go.
Still, we do think that markets, and consequently the economy, will become “Fed up” with too much tightening, if growth (and employment) are tangibly slowing alongside of these tighter policy moves. Is the economy there yet? No, not yet, but investors are clearly watching every economic and corporate report and survey to see where inflection points are presenting themselves (including global conditions). The Fed should be closer after today to being receptive to signs of inflection points. We think they are, and are looking for places to pause and watch their aggressive policy work through its way through the system. The odds are that they see those signs over the coming months."
