March 16th FOMC Follow-Up

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  • A new rate hiking cycle has begun with today’s decision by the FOMC to increase the federal funds target rate by 25 basis points to a new target range of 0.25% to 0.50%. This outcome was widely expected.
  • The decision was not unanimous, as one Committee member, St. Louis Fed President Jim Bullard, voted against the measure. Bullard favored a 50-basis point rate increase.
  • In its revised dot plot, the Fed now shows FOMC participants targeting six more rate hikes in 2022, with a median year-end target rate of 1.9%.
  • The initial market reaction to the Fed announcement was negative, with rates spiking across the yield curve and the S&P 500 trading down into negative territory, but this was followed by a strong rebound that put the S&P well up for the day and returned the 10-year yield to near its starting point for the day.
  • The 5 to 10-year part of the US Treasury yield curve is now flat, with the 7-year yield slightly higher than the 5 and 10-year yields.

Fed Balance Sheet

  • The Fed foreshadowed potential future moves to reduce the size of its balance sheet, noting “the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.”
  • For now, the Fed will maintain the size of its balance sheet by reinvesting principal payments on existing Treasury and MBS holdings into new assets.

Economic Conditions

  • The Fed reduced its 2022 median GDP projection to 2.8% from the 4.0% value that had been projected in December. Longer-run GDP projections were unchanged.
  • Median unemployment expectations are consistent with prior expectations aside from a slight bump up from 3.5% to 3.6% for 2024.
  • Inflation expectations saw meaningful upwards revision. The Fed now projects 4.3% PCE inflation in 2022. That compares with a December projection that pegged 2022 PCE at 2.6%. 2023 and 2024 projections saw smaller increases.

The FOMC is next scheduled to meet May 3-4, 2022


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