Federal Reserve Chairman Jerome Powell on Wednesday indicated than the central bank will consider raising its policy rate in March for the first time since 2018, given elevated inflation and a strong labor market.
The central bank also put out a statement to guide their eventual plan to shrink its balance sheet.
But the key takeaway came later, from Powell’s press conference, where the chairman took a hawkish tone.
Most notably, Powell intimated that the Fed is leaning toward more than the three quarter-point rate hikes that they penciled in last month, said Derek Holt, head of capital markets economics at Scotiabank.
Holt has forecast the Fed is going to raise its policy rate to 2% this year. He said Powell’s comments give him confidence in that outlier forecast.
Powell’s comments were “a pretty strong signal that they’re going to go faster than the market has priced in,” Holt said in an interview. Before Powell started speaking, the market expected four rate hikes this year.
Holt also noted that Powell refused the opportunity to dismiss speculation that the Fed might raise rates at consecutive meetings, or hiking in 50-basis-point increments.
“Bottom line, the risks are skewed to more than the four hikes this year,” agreed Ethan Harris, global economist at Bank of America Securities, in a note to clients.
Brian Bethune, a professor at Boston College, said Powell needed to come across as more of an inflation-fighter because that is now his primary focus.
“He’s had to change from a major key — ‘we need stimulus’ — to a minor key — ‘we’ve got to deal with inflation,’” Bethune said.
The sudden nature of Powell’s shift — from being relatively dovish in September and October — is just an example of the “compressed nature” of the economic cycle coming out of the pandemic, Bethune said. Even the COVID-sparked recession only lasted two months, he noted.
Chris Low, chief economist at FHN Financial, noted that Powell was also hawkish about the balance sheet, saying he was open to allowing the portfolio to shrink sooner and faster than the last cycle.
“Add it all up and while there is nothing explicit suggesting the Fed will tighten faster than communicated previously, there are plenty of hints in that direction,” Low said.