On the January FOMC

The removal of any mention of “gradual further increases” in the FOMC statement, and the enshrinement of the buzzword “patient,” fully make up for the failure at the December FOMC to deliver the promised “dovish hike.” We now have a dovish pause. In the press conference, Powell clarified that the next hike will be when it is “needed,” with an unwelcome rise in inflation offered as the only factor that would constitute need. A separate statement indicated that the balance sheet would be larger than expected, but not actively managed. Yet the Fed stands ready to use it again in an emergency. Powell amplified on that in the press conference, but avoided premature commitment to exact parameters. This evidence that Powell can listen to markets, and be more articulate about policy, removes a substantial risk, justifying the first-ever Powell FOMC day on which stocks posted gains. When the bond markets grasp that these policies are pro-growth and pro-inflation, 10-year yields should rise.