Federal Reserve issues FOMC statement
As expected, the FOMC raised the short term rate another 0.25% to a range of 1.00%-1.25%. It feels like we are finally in a consistent hiking cycle. More importantly, we need to look past the headlines.
The most interesting development was a few phrases about decreasing the over $4.4tn balance sheet later this year along with an addendum outlining the process. I think this is an optimistic goal as I don’t believe we should see a balance sheet reduction until we get the short term rate up around 1.75%-2.0%. Obviously this is possible as the FOMC can still raise the short term rate 0.25% in September and 0.50% in December while simultaneously enacting the balance sheet reduction program. While this is optimistic (perhaps not realistic nor healthy), I would be more than happy to see balance sheet reduction this year.
The other development that stands out to me is Chairwoman Yellen’s comments that everything being is in place for higher inflation. I’ve been touting this for some time, so either we are correct or blissfully ignorant of reality. Lastly, I tend to believe Chairwoman Yellen is using an oft forgotten central bank policy tool: the power of words. Often times by telling market participants inflation will pick up is enough to cause a little more inflation as expectations for inflation typically filter through the system to cause real inflation.