10 THE NAFCU JOURNAL March–April 2022 THE FED’S BIG DILEMMA By Curt Long THE BOTTOM LINE In 2000, former Bank of England Governor Mervyn King acknowledged what many had long suspected: central bankers aspire to be boring. Their aims are stability and predictability, their world rife with anxious deliberations over quarter-point interest rate adjustments. In such a staid profession, what happened over the final months of 2021 qualifies as dramatic pyrotechnics. As of September, the Federal Open Market Committee (FOMC) was still holding the inflation hawks at arms’ length, with half of its members expecting rates to remain at zero through 2022. But in the weeks that followed, inflation readings remained stubbornly elevated, a new read on wage growth was higher than expected, and the pivot was on. By December, the median committee member was calling for three rate hikes, and market participants were expecting four or even five. But while inflation was the catalyst for the pivot, it will not be what determines the Fed’s rate policy in 2022. That honor goes to the yield curve. Yield Curve, FOMC Actions 14 12 10 8 6 4 2 0 3.00 2.50 2.00 1.50 1.00 0.50 0.00 -0.50 2015 2016 2017 2018 2019 2020 2021 # of Mentions Rate cut Rate hike Percent # of Mentions (right scale) Avg 10Y–3M Spread (left scale) Notes: “Number of mentions” refers to the number of times the phrase “yield curve” appeared in the FOMC’s meeting minutes, excluding references to foreign central banks and discussion of yield curve control policy. Rate spread measures the average difference in yields between 10-year and 3-month Treasuries during the inter-meeting period. Sources: Board of Governors of the Federal Reserve, U.S. Treasury Dept.
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