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Shifting Gears Abruptly, Fed Gains Confidence

​Hard to believe just ten days ago, Atlanta Fed President Lockhart was trying to convince us not to fall asleep on March’s FOMC meeting because it was still a live meeting!

Fed communication since December had made clear the FOMC preferred to be patient with rate hikes as long as 1) inflation was sluggish and 2) uncertainty around government policy and the economic outlook remained elevated.

So what changed? The Fed’s reaction function became more aggressive. Measures of core inflation have not surged higher; nor has the cloud of uncertainty lifted. The Fed’s shift in policy stance can only be attributed to how they process this information - a reassessment of risks and the economic outlook. Specifically two things seem to be different now:

• The FOMC has more urgency to take policy action immediately​

• The FOMC no longer feels uncertainty is sufficient to keep them on hold

The only question remaining is: How enduring will this aggressive policy stance be? Will they retain the more hawkish position even after the March meeting? Or will they revert back to a more patient approach? We will have to wait for the March statement and press conference to learn more about that.