INTRODUCTION As inflation continues to trend lower, most central banks appear to be done hiking interest rates. The European Central Bank...
Remember Mad Libs, the word game where players slot adjectives, nouns and verbs into a paragraph? The game speaks to the power of word choice and how a word in the wrong spot can spark a wild reaction. I think the Federal Reserve recognizes the power of word choice, which is why it is intentional and exacting when crafting messaging. Markets tend to pay close attention to what the Fed says (or doesn’t) and what it signals about the path for future policy rates.
On 22 March, the Fed announced it would raise the target range for the federal funds rate by 25 basis points.[i] The statement revealed notable shifts in language from the previous statement (issued on 1 February)[ii] that indicate a more dovish tilt. Below, I break down some key changes in phrasing and what they may signal about the Fed’s intentions.
My interpretation: The FOMC (Federal Open Market Committee) replaced “ongoing increases” with a more cautious “some additional policy firming.” In addition, “will be appropriate” was replaced by “may be appropriate,” taking any certainty away. The FOMC appears to be signalling that it is approaching the end of the road; that while another rate is feasible, it is not a foregone conclusion.
The phrase ‘sufficiently restrictive” is important to me. I think it refers to the FOMC’s determination to keep rates at the terminal level for as long as it deems necessary to ensure that both actual and expected inflation slide back to target.
The statement about monitoring incoming information and assessing the implications for monetary policy has not appeared in any press statements in the past year. I believe the statement is another signal that the FOMC is watching the banking situation closely.
My interpretation: I view this as a marginally stronger assessment of the labour market. The Fed scrapped its previous references to Ukraine or the pandemic. It appears it has moved to other risks now.
My interpretation: The banking statements are completely new. Fed Chair Powell indicated in the press conference that the (FOMC) factored tightening financial conditions from the banking situation into its decision. I believe it will continue to do so as the situation evolves.
My interpretation: The Fed scrapped the mention of inflation easing somewhat, likely due to strong CPI (Consumer Price Index) readings since the last statement.
The take-home message
In my view, the FOMC is signalling openness to further 25-basis-point rate hikes to reduce inflation, and it would accept weakening in the labour market. However, I believe a spreading banking crisis or a credit crunch could end the cycle of tightening.
By Brian Horrigan, PhD, CFA, Chief Economist
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