- With a decidedly dovish twist, at the January meeting the Fed signaled that the current target for rates (2.25%-2.5%) is appropriate for now. Any mention to further rate hikes was removed from the press statement. The FOMC will be patient in assessing whether and how to revise its target.
- The committee broadly confirmed its positive outlook for the economy, but with somehow less conviction; the pace of growth has been downgraded from “strong” to “solid”. Such a swing only six weeks after the December meeting was motivated by the sustained tightening in financial conditions and clearer evidence of slower global growth.
- Another big change concerned the balance sheet rundown: after stating in December that it was on “auto pilot”, the Fed is now prepared to adjust it in light of economic and financial developments. According to Chair Powell, the bigger than expected demand for reserves by financial intermediaries requires that the shrinking of the balance sheet end sooner than expected.
- Summing up, another rate hike this year appears now more likely than two. Yet, given the Fed’s strongly signaled willingness to revise its target rate in line with data (which are less clear cut than a few months ago) the uncertainty around the prediction is much bigger than in the past.
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