- A rate change in December is still on the table
o This is a surprise
o Fed still sees inflation on horizon and thinks recent low inflation was due to transitory pressures
o Expectations and trends were for no rate hike in December. Market has been shrinking the Dec hike probabilities for weeks. Market probability jumped to 63% today.
- Rates are going to be the tool for monetary policy not the balance sheet
o This is pretty surprising
o Balance sheet runoff is going to happen essentially no matter what. Only a “material deterioration” in economic conditions might cause Fed officials to consider resuming reinvestments.
- Essentially the Fed wants balance sheet manipulation to be only for emergencies. The path to unwind is very slow and gentle but also looks almost set in stone.
It looks a bit hawkish. The Fed wants to get normalization going but also keep it going. Even on the rate-hiking front, they don’t want to derail their plan. This is in contrast to market expectations.
The easy-money party continues but it is winding down and the Fed is pretty dedicated to eventually ending it at the pace they outlined last year: three hikes a year.
The market is at the same level as yesterday.
Is the interest rate environment the same as yesterday?
What do equity markets see?