Changes in Monetary Policy Since 2022

The Powell Pivot A few key words in the statement following the December FOMC meeting signaled a shift within the Fed about where it thinks it is its battle against inflation. It said that we might not need “any” additional rate hikes, given the credit tightening still in the pipeline and that “inflation has eased over the last year.” Inflation is approaching the Fed’s 2% target. The Fed didn’t declare victory or pop Champagne corks; it just acknowledged that we are closer than most expected to price stability. More importantly, Fed Chair Jay Powell pivoted from hedging against a more persistent inflation to experimenting with growth. He said ..”we are aware of the risk of hanging on too long…and we are very focused on not making that mistake.” That is a 180 degree shift from the Fed’s approach in 2022 and much of 2023. I remember well the 8 minute 34 second speech Powell gave at the Jackson Hole Symposium in 2022. It was like being doused in a bucket of ice. Powell made clear that the Fed would do whatever necessary to derail inflation, including triggering a recession. The comments by Powell at the December press conference represented a 180 degree pivot from that stance. The Fed did NOT commit to a March cut in rates nor did it fully slam the door on another. Instead it acknowledged how rapidly inflation has cooled without a consequential increase in unemployment. New York Fed President Williams further clarified that latter point to calibrate the knee jerk reaction by financial markets. He underscored that a rate cut is not imminent. That doesn’t change a few key issues: inflation is cooling and poised to cool further, the economy has weathered rate hikes remarkably well and the Fed doesn’t want to be the enemy of growth for no reason. If a little more growth enables an easier transition to full healing from the pandemic recession and the inflation it triggered, then that is something to lean into not against. When will the Fed cut? We still think May is more likely than March because improvements in inflation are likely to slow with a stronger consumer demand. However, stranger things have happened. Another nuance is that the Fed still believes the descent in rates will be slower than the ascent. The 2010s were the anomaly, not the norm.

US consumers got a USD 600 billion tailwind from locked-in #mortgages. We estimate the gap between existing and market rates for US mortgages has provided consumers with an extra USD 600 billion since early 2022 (up to 2% of disposable income). This has undermined the monetary #policy transmission mechanism and helps explain why US consumer spending has remained resilient to monetary tightening. The flip side of this means that locked-in mortgage rates may similarly limit the effectiveness of monetary policy easing, adding to the list of downside risks to growth and also to maintain #affordability pressures. For example, year-on-year house price growth has moderated to below 6%, but prices remain 60% above 2020 levels.   During the recent Federal Reserve monetary policy tightening cycle, market rates for US mortgages exceeded the average rate borrowers paid on existing mortgages by as much as 3.2 percentage points. Such a gap has significant economic implications: it lowers monetary policy effectiveness by supporting consumer resilience during hiking cycles and reduces the stimulus effect when rates ease. The structure of the US mortgage market causes this effect. Over 95% of US home loans are 15- or 30-year fixed-rate mortgages. By the end of 2Q24, the market rate for mortgages was roughly 7%, compared to an average existing mortgage interest rate of about 4%. We reviewed this gap for the two years through 2Q24 and estimate that homeowners with fixed-rate mortgages amassed over USD 600 billion in "savings" from their mortgages in the post pandemic expansion, amounting to nearly 2% of personal consumption spending. This helps explain why recent policy tightening did not, initially, appear to slow the economy.   We expect limited stimulus for consumer spending from the monetary policy easing cycle, expected to start in September, due to this low interest rate sensitivity of private consumption. With spending tailwinds fading though and equity markets priced to perfection, the downside risks to growth have risen, threatening a sharper easing cycle over the next year than our baseline currently assumes. https://lnkd.in/eTXtwBjC James Finucane, Mahir Rasheed, Jessica Oliveira Lee  

As part of my ongoing commitment to transparency in my monetary policy views and decisions, I’d like to share a few observations. I supported last week’s FOMC decision to lower the target range for the federal funds rate by 25 basis points, although for me, it was a close call. While my analysis in November had leaned towards holding policy steady, by the December meeting, available information suggested the balance of risks had shifted a bit. Scenarios with a notable further rise in inflation seem somewhat less likely. This reflects the decline in some measures of longer-term inflation expectations, recent trade-policy changes suggesting a lower effective tariff rate, and a softening labor market. On that, some recent evidence – in part anecdotal – points to pockets of fragility, especially among smaller businesses.   Still, with nearly five years of elevated inflation, I remain concerned about potential inflation persistence. It was important to me that the forward guidance in the Committee’s statement now echoes language in the December 2024 statement, which preceded a pause in cutting rates. Of course, policy is not on a pre-set path. However, given a policy stance that is at the lower end of a range I view as mildly restrictive, I would want greater clarity about the inflation picture before adjusting policy further, to ensure a timely return of inflation to the Committee’s 2 percent objective. 

🏠📉 Another Fed Rate Cut, But Housing Relief Remains Limited The Federal Reserve closed 2025 with its third consecutive rate cut, bringing the federal funds rate to 3.5% to 3.75%. While the move reflects growing concern about a cooling labor market, it does not offer meaningful near-term relief for the housing market. Instead, it highlights how limited monetary policy has become in addressing today’s supply and affordability challenges. Inflation remains above the 2% target and job growth continues to soften, leaving the FOMC divided on the path forward. Chair Jerome Powell noted that after seventy-five basis points of easing since September, policy is now nearing a neutral range. Inflation risks still lean upward while employment risks lean downward, creating a difficult balance heading into 2026. The Fed’s updated outlook projects GDP growth of 2.3% next year, supported by consumer spending, fiscal activity, and productivity gains tied to artificial intelligence investment. Inflation is expected to ease gradually, and most officials anticipate only one more rate cut in 2026, though opinions vary. For housing, the impact will remain modest. Mortgage rates follow the 10-year Treasury yield more closely than the Fed’s benchmark rate, and current expectations point to rates stabilizing rather than falling sharply. With many homeowners locked into ultra-low mortgages and construction still lagging long-term demand, any improvement in affordability is likely to be slow and uneven. Powell acknowledged this directly, noting that the structural shortage of homes limits how much rate policy can accomplish. Even with lower borrowing costs, the market lacks the supply needed for a meaningful shift. For consumers, the impact will be gradual. Mortgage rates should settle near the low 6% range, credit card APRs may tick down but remain elevated, auto loans will stay costly, and high-yield savings rates will continue sliding as banks adjust to lower benchmarks. Job seekers may benefit from lower borrowing costs that support hiring, particularly among businesses reliant on capital. A major wildcard for 2026 is the expected change in Fed leadership. If a more dovish Chair is appointed, borrowing costs could fall more aggressively than currently projected. This latest rate cut reflects an economy at a crossroads: inflation easing but persistent, the labor market softening, mortgage rates stabilizing but still elevated, and a structural housing shortage that continues to define market conditions. This shift marks progress, but not momentum, and it makes clear that true affordability will emerge slowly rather than suddenly. Continued in the comments 👇🏾 #FederalReserve #InterestRates #HousingMarket #RealEstateInsights #MortgageRates #EconomicUpdate #Inflation #LaborMarket #Homebuyers #FinanceNews #MarketOutlook #HousingAffordability

Howard Speaks: How Will Inflation Affect Dentistry? by Dr. Howard Farran. I’m old enough that I’ve lived through the previous era of real inflation in the United States: 1970–1982. When I was a kid, my father owned a few Sonic drive-in restaurants, and my Sunday morning job every week after Mass was to scrape prices off the menu boards with a razor blade and replace them with new, higher prices. Every week, some items would creep up a nickel or two. As a consumer during those times, inflation got so bad that it felt like if you got paid on a Friday, you needed to go cash that check ASAP and buy whatever you needed that same day, because the price was going to go up Saturday, Sunday, and Monday. In 1979 Paul Volcker implemented aggressive rate hikes, raising the federal funds rate from about 11% in 1979 to 20% by June 1981. These high rates persisted into 1982, after which inflation was brought under control, and rates were gradually lowered. Volcker’s policy caused a deep recession in 1981–1982 but successfully reduced inflation from double-digit levels to under 4% by the mid-1980s. Anyone who grew up during the next 40 years or so hasn’t lived through a period of true inflation. Exercise caution… Jerome Powell, serving as the Chairman of the Federal Reserve since 2018, in response to rising inflation, increased the federal funds rate multiple times between 2022 and 2023, reaching a peak of 5.25% in early 2024. He also introduced Quantitative Tightening (QT) by reducing its balance sheet by allowing maturing securities to roll off without reinvestment, effectively decreasing the money supply. This process, known as quantitative tightening, was reintroduced in June 2022 to counter historically high inflation resulting from the COVID-19 pandemic. As inflation showed signs of easing, the Fed began lowering interest rates cautiously. In September 2024, a significant half-percentage-point cut was announced to maintain economic stability. By November 2024, Powell indicated that further rate cuts would proceed slowly, given persistent inflation. The halcyon days when auto dealers were offering 0% financing for purchases are mostly over, for now. These experiences teach you why it’s always important to make sure all your loans are fixed-rate ones; the people I know who got wiped out the worst during the inflationary periods always had floating interest rates on their debt. This is also not a time to be picking up extra “toys”; if it flies or floats, you don’t buy it, you sell it. Take a good look at how you’ve been living: It may be time to downsize that lifestyle to match what you see going on in the practice that funds that lifestyle. Earlier this year, for example, I realized I was an empty-nester in a giant McMansion so I sold it and downsized into a much smaller place. … but don’t panic just yet Dental practices have already been having problems finding good people to fill available positions.

The Bank of Canada reduced the overnight rate to 4.25% and continued quantitative tightening amid cooling inflation and soft growth. The dovish statement goes so far as to indicate more rate cuts to come with ongoing disinflation. The Bank acknowledges the progress made on inflation. As inflation is firmly on track to reach 2% next year and unemployment rises in a slow job market, growth becomes a priority. We expect one more 25 basis point rate cut this year, ending 2024 at 4%. Furthermore, we expect rate cuts to continue into 2025 until the terminal rate is reached, which we estimate to be between 3% and 3.5%. The downside risk to growth has risen as high interest rate restrict consumer spending and business investments. In the last quarter, the economy expanded primarily thanks to government spending. In addition, new restrictions on temporary residents – both international students and temporary workers – will put a lid on aggregate consumer spending. Over the past year, consumer spending per capita has declined as households tighten their purse strings, and aggregate spending only grew because of population growth via immigration. Now, with fewer immigrants coming in, the slack in the economy will become more apparent. Therefore, more rate cuts are needed to revive the economy and boost spending per capita. 

"The Powell Pivot" 👉 In a dovish speech at the Fed's Jackson Hole conference last week, Federal Reserve Chair Jerome Powell signaled that a rate cut is coming at the September FOMC (Federal Open Market Committee) meeting. He cautioned that the timing and pace would depend on the incoming economic data. Mr. Powell outlined two priorities for the months ahead: 1️⃣ Keeping the US economy on a growth trajectory 2️⃣ Reviewing what the Fed did wrong the past few years 🙌 At the Kansas City Fed's annual Economic Policy Symposium, Mr. Powell said: "As we begin this process later this year, we will be open to criticism and new ideas, while preserving the strengths of our framework. The limits of our knowledge - so clearly evident during the pandemic - demand humility and a questioning spirit focused on learning lessons from the past and applying them flexibly to our current challenges." 🤔 In the 4 years since the central bank last revamped its policy framework, it has witnessed a once-in-a-century global pandemic, historic fiscal stimulus and multiple geopolitical crises - all of which helped propel inflation to the highest levels in 4 decades! Mr. Powell himself acknowledges the Fed was slow to begin raising interest rates in 2022 because they misjudged how persistent inflation would be. 💡 With respect to the path of interest rates, Goldman Sachs now believes the #FOMC will deliver three consecutive 25 bps (0.25%) cuts at the September, November, and December meetings (see the chart below from Bloomberg). #FederalReserve #MonetaryPolicy #InterestRates

The Fed / Rates. Mohamed El-Erian has been one that I've followed the most through this rate cycle and I feel he's been on point. His opinion piece on Bloomberg today speaking to 3 risks he sees with the current Fed and their approach. "Whether traditionally thought of as "hawks" or "doves," Federal Reserve officials have recently converged to notable uniformity in their policy signaling of high interest rates for longer. It is a situation that raises three risks to economic prosperity and financial stability." "The first has to do with how highly and, I would argue, excessively reactive the Fed has become in its policy approach or, to use the most popular Fed phrase these days, its "data-dependent" approach. This led the central bank to pivot to more dovish signaling just last December, in turn giving markets the confidence to price in six or seven rate cuts for this year. The string of favorable inflation readings that prompted the pivot then gave way to less comforting data in the first quarter and, with that, the ongoing U-turn, with markets now expecting only one or two cuts." "The second risk is that the U-turn coincides with a growing number of companies expressing concern about weakening consumer demand. This is particularly the case for those serving lower-income households where pandemic savings have been totally depleted" "The third risk is that the Fed's policy signals are calibrated using an outdated inflation target of 2%. Remember, 2% is not the output of some sophisticated econometric model that seeks to find an optimal steady-state level for inflation that is consistent with the structural realities of the economy and the Fed's other (employment) mandate. Rather, it is an arbitrary target that originated in New Zealand in the 1990s" "As I have argued before, 2% may now be too low a target for a domestic economic approach that is no longer anchored by the "Washington Consensus" of liberalization, de-regulation and fiscal discipline. We are living in quite a different economic policy paradigm in the US" "I suspect that the question for monetary policy going forward is not whether the Fed will flip-flop again. Another U-turn is almost certainly in the cards for a central bank that continues to lack a strategic anchor, and that will react belatedly to growth slowing more than policymakers expect or are comfortable with. The critical question is whether this occurs in time to avoid significant economic and financial damage, particularly to the most vulnerable segments of the population." #markets #rate #fed #banking https://lnkd.in/e78-Yxcj

Powell is Wrong About Why Mortgage Rates Have Increased. At the news conference following last week’s meeting of the Federal Reserve, a reporter asked Fed Chair Jerome Powell why mortgage rates have increased by a full percentage point to about 7% since the Fed cut its target rate in September 2024. Powell answered, “So, as you know, as we’ve reduced our policy rate 100 basis points, longer rates have gone up, not because of expectations—not principally because of expectations about our policy or about inflation; it’s more a term premium story.” A close look at recent history shows that Powell is wrong. The Fed’s misguided easing last September is the likely culprit in explaining the jump in mortgage rates. Mortgage rates closely follow the rate on 10-year U.S. Treasury securities and that is why Powell blames the rate increase on “a term structure story.” He is referring to the term structure of interest rates, often called the yield curve, which is the relationship between yields on long-term securities like the 10-year Treasury bond versus yields on shorter-term securities like the 2-year Treasury. Long term rates tend to be averages of current and expected future short-term rates plus a risk premium reflecting the greater price volatility of longer-term securities. The capital uncertainty of long-term bonds usually creates a premium to long-term interest rates over short-term rates but not always.  If expected future short-term rates are much lower than the current short-term rate the term premium can be negative. And that is how it was in the U.S. between July 2022 and September 2024. The term premium (tens minus twos) was negative by an average of 47 basis points from July 1, 2022 until September 17, 2024, reflecting an expectation that the Fed’s tight monetary policy would cause a recession and lower inflation. But that changed after the Federal Reserve lowered its target rate by ½ percentage point on September 18, 2024. The term premium since then has averaged plus 18 basis points. It would be a remarkable coincidence if the shift to a positive term premium after September 17, 2024, were, in Chair Powell’s words, “unrelated to our policy.” Mortgage rates have increased by about a full percentage point since September 2024 because the 10-year Treasury rate has increased by a similar amount. And the jump in the ten-year Treasury most likely reflects the Fed’s premature easing back then and increased inflationary expectations. Good luck, Bill Silber, February 2, 2025, 4pm. #economy #interestrates #investments  

The Federal Reserve Board's recent decision to reduce interest rates by 50 basis points, bringing the fed funds rate down to 4.75%-5.00%, was a significant move amidst concerns about inflation and a slowdown in job growth. Markets had already priced in a 60% chance of this cut, reflecting the ongoing debate within the Fed, with one member preferring a smaller reduction. Despite inflation nearing the Fed’s 2% target, worries about economic growth and a softening labor market have led to discussions of further cuts, with expectations split between a 25 or 50 basis point reduction before the September 2024 meeting. Speculation looms about additional cuts this year, possibly totaling 75 basis points, as the Fed aims to balance inflation control with economic risks. #investmentbanking #privateequity #scaleup #growthcapital #founder #technology #useconomy