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Fed Runs Open Mouth Operations: Rate Cuts Coming! But Not Yet
Mike Maharrey | | |
The Federal Reserve didn't do anything at all at the January Federal Open Market Committee (FOMC) meeting. But Jerome Powell aggressively ran "open-mouth operations" trying to dampen market expectations for a rate cut at the March meeting.
Nevertheless, one thing is clear: interest rate cuts are on the horizon.
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Just not yet.
The FOMC left the federal funds rate unchanged in a range between 5.25 and 5.5 percent. That was the only actual policy announcement coming out of the meeting.
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Everything else was just talk.
But Fed-talk – open-mouth operations – moves markets just as forcefully as concrete policy changes – sometimes even more so. The central bankers at the Fed use messaging as a policy tool.
That's what Wednesday was all about. Powell and Company released enough hawks to slow the market's roll but let just enough doves fly to prevent a market meltdown.
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| The Fed Is Finished Hiking Interest Rates | | |
The first message out of the FOMC meeting was rate hikes are over. The committee made that clear by removing language from its official statement.
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For months, the FOMC statement has included a phrase asserting "In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account…"
In the latest statement, the committee removed all mention of "additional policy firming." Instead, the statement reads, "In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data."
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This clearly signals that the next move on rate cuts will be down.
During the post-meeting news conference, Federal Reserve Chairman Jerome Powell confirmed that the central bank has likely reached the peak of this hiking cycle. | We believe that our policy rate is likely at its peak for this tightening cycle and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year. | | | |
| We Want Our Interest Rate Cuts! | | |
The stock market has soared over the last few months, hitting record highs in anticipation of a return to the easy money everybody loves and desires. Most people believed cutting would begin in March.
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Easy money is the mother's milk of this debt-riddled economy. The Federal Reserve spent more than a decade holding interest rates artificially low and pumping liquidity into the economy. That incentivized borrowing, and today, everybody from the federal government to American consumers is buried to their eyeballs in debt.
Debt and high interest rates don't mix and that's why everybody yearns for rate cuts – sooner rather than later.
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Powell threw cold water on those hopes and dreams, going out of his way to talk down expectations for cuts at the March meeting. While the FOMC made it clear those cuts remain on the table, the messaging was "not yet" and was clearly intended to dampen market enthusiasm.
That's likely because every member of the FOMC knows that inflation isn't dead and buried. No matter how you slice the most recent CPI data, it remains well above the mythical 2 percent target. Powell even said so out loud. | Inflation is still too high, ongoing progress in bringing it down is not assured and the path forward is uncertain. | Powell emphasized the committee may need additional signs that inflation is easing before it begins "dialing back the restrictive level" and cutting rates... Read More > >
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Mike Maharrey is a journalist and market analyst for MoneyMetals.com with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida. | |
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