Comments on the Federal Open Market Committee result from Jean Boivin, Head of Blackrock Investment Institute.
- The Fed clearly signaled it wants to get back to neutral asap. That makes perfect sense. This a restart – not a recovery – that largely happens on its own and doesn’t need stimulus. Going faster to neutral doesn’t have to change the cumulative number of hikes.
- But the Fed has a different rationale: using 2015 as reference. That’s concerning: 2015 was very different. That was a recovery in a demand-driven environment. Now it’s a restart in a supply-driven one. Neutral might be closer. Calibrating off 2015 likely means overtightening.
- The Fed reconciles its new broad and inclusive employment mandate by assuming labor force participation will remain subdued. I see only a downside risk to this: the labor market hasn’t fully healed and if the participation rate recovers further, it’ll have even more room to run.
- Bottom line: The Fed is signaling an intent to ease off the gas and not hit the brake. But by benchmarking normalization against a typical recovery, they risk unwittingly slamming the brakes. I think they’ll adjust once this becomes clear, but we should expect a bumpier ride.