Fed Meeting Recap: Contractionary Policy Inbound
By Robert Posillico | March 31, 2022
The Fed concluded their March meeting with signs of economic skepticism facing high inflation, a persisting pandemic, and foreign policy concerns. Over the last several months, inflation has increasingly become an issue. The initial notion that it is fully transitory seemingly fizzled away with the Fed preferred gauge of PCE (Personal Consumption Expenditures) rising at an annual rate of 6.1% in January, well above the target of 2% for over a year now. This concern is echoed in CPI (Consumer Price Index) data rising at an annual rate of 7.9% last month; both indexes are at their highest rates since the early 1980s. The Fed has officially announced contractionary monetary policy measures that many expected to combat this. What this means is that they are stepping in to essentially cool down the economy and ease rising prices with a series of interest rate hikes for the first time since 2018. The Fed is setting a new target for the federal funds rate at 0.25 - 0.5, raising it about 25 basis points from near-zero level throughout the pandemic, with six more rate hikes penciled in throughout 2022. In addition, the Fed has its sights on reducing the size of its balance sheet, which sits at just under 9 trillion dollars due to the record asset purchasing done to stimulate the economy throughout the pandemic. The balance sheet stands at nearly 36% of GDP, the highest level since WWII. While this contractionary policy will slow the economy and potentially lead to a recession and higher unemployment, Fed chairman Powell expresses that the chances of falling into a recession are low as forecasters predict aggregate demand to remain high. Not everyone agrees as famed investor Carl Icahn told CNBC in a recent interview, “I think there very well could be a recession or even worse,” addressing how the fed policy changes and inflation have us in for a “rough landing.” Nonetheless, these measures to stabilize prices are necessary for long-term growth. There is a current “misalignment” with the supply and demand of the labor market; as Powell stated, “Without price stability, you really can’t have a sustained period of maximum employment.” All eyes will be on the Fed again when they meet in early May to assess progress. Until then, we wait and see as additional macroeconomic data continues to paint a picture of the current, potentially grim, state of our economy.
Edited by Joseph Barbieri