DEEP DIVE: The Fed - Peak Hawkishness?

The FOMC’s two-day meeting ends tomorrow. At 2:00 p.m., the committee will issue its statement, and at 2:30 p.m., Fed Chair Jerome Powell will hold his usual after-meeting press conference. For the other Fed officials, the blackout period preventing public comments ends on Friday. The next blackout period starts on March 11.

So we can look forward to lots of commentary from the Fed heads in coming days. Most of it is likely to be hawkish. But on balance, they should be less so than they were during 2022. They are likely today to raise the federal funds rate by 25bps to 4.50%-4.75% and say that it is getting closer to restrictive, implying that they will vote for two more 25bps rate hikes at each of the next two meetings of the FOMC (on March 21-22 and May 2-3).

That would bring the federal funds rate to 5.00%-5.25%, which coincides with the committee’s December 14, 2022 projection of the federal funds rate at 5.10% for this year, falling to 4.1% next year and 3.1% in 2025. Nevertheless, for now, Fed officials are likely to reiterate their intention to keep the federal funds rate at a restrictive level for the foreseeable future and to stress that they have no intention of lowering interest rates anytime soon.

Of course, the Fed heads could turn more hawkish, squawking that this key rate may have to be pushed even higher if the labor market remains too tight and inflation doesn’t continue to moderate toward their goals of 3.1% this year, 2.5% next year, and 2.1% in 2025. (See our FOMC Economic Projections.)

Fed officials remain data dependent, so let’s see what the latest relevant data show:

(1) Employment. December’s JOLTS release and January’s ADP employment report will be out this morning, just in time for these labor market indicators to have some impact on the FOMC’s decision. We know that the labor market remains tight based on the recent historically low readings of initial unemployment claims (Fig. 1).