On the January FOMC

Stocks gave up the day’s gains and long-term yields backed up when Powell said run-off of the balance sheet “will just run in the background,” an echo of his “on automatic pilot” characterization at the December 2015 meeting. Discussing it in a separate statement released today, the Fed is trying to draw attention to this alternate policy tool, so we can’t rule out that Powell’s seeming gaffe was deliberate. The regular FOMC statement dropped longstanding contingencies for lift-off, saying it will be “soon.” Emphasizing run-off blunts the risk of a headlong hiking campaign by offering a harm-free policy tool that can substitute for hikes while appearing to “do something” about inflation, buying time until it proves to be transitory. Powell acknowledged economic impact from the large number of Omicron infections. By the March meeting, those will have produced two very weak jobs reports. We would have liked more solid clues today, but reiterate our outside-the-box call for no lift-off in March.