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The Federal Reserve is likely to signal a March rate hike

Jerome Powell, Chairman of the U.S. Federal Reserve Board, speaks at his hearing on renominations to Senate Banking, Housing and Urban Affairs Committee, Capitol Hill, Washington, U.S.A, January 11, 20,22.

Graeme Jennings – Reuters| Reuters

Expect the Federal Reserve to announce this week that it will continue to increase interest rates and consider other tightening options, as well as reverse the policies it had put in place for fighting the pandemic.

Two-day Fed meeting begins Tuesday. On Wednesday, central bank officials will issue a new statement indicating its determination to reduce inflation. Fed officials expect to announce they will increase the Fed Funds Rate from zero to March amid a dramatic stock market correction.

Mark Cabana of Bank of America, Head of U.S. Short Rate Strategy said that they don’t expect the bank to sound “dovish”. “The [bond]The market appears to have reacted to the fall in equity prices and the rising geopolitical tensions. So maybe the Fed is not quite as hawkish. We don’t believe the Fed will tell the markets that it is wrong to price in four rate increases this year.

After two years of very easy policies to combat the financial and economic effects of the pandemic, the Fed now faces its biggest battle against inflation since decades. The consumer price index in DecemberThis was the largest increase since 1982, at 7%

Cabana stated that the Fed might indicate its first rate increase since 2018 as early as March in this week’s statement. Similar comments were made in 2015. This statement was one month before the Fed’s first rate increase following the financial crisis.

The Fed has been more challenged by the selloff in stock markets than anything else. The S&P 500 dipped into correction territory MondayThe record-setting close was 10% lower than the closing price, just before an enormous intraday market reverse. The Fed must recognize these risks, as Russia is threatening military action against Ukraine and the pandemic continues.

They will need to state that they will act as the circumstances dictate. There is inflation that we need to manage and, despite what we are seeing, the financial environment is too relaxed. This is the best message they have at this point,” stated Diane Swonk chief economist at Grant Thornton.

Following the Fed’s 2 pm. statement, Powell will update the media. ET statement. Powell is expected to be hawkish in tone.

“I believe he’ll say every meeting’s live. We’ll use every tool we have to address inflation which remains a problem even with our tools. S&P 500Down 10% Cabana stated that the number is still 15% higher than last year. This is not going to scare them. They must tighten their financial conditions to manage inflation better. I don’t believe the Fed will be shocked by this. Nor do I think that they will feel like the economy is about to crash.

Another policy tightening

Fed officials are also discussing reducing their $9 trillion-plus balance sheet that nearly doubled in the aftermath of the pandemic. The central bank’s December meeting discussed the balance sheet. Some strategists believe that the end of the current financial crisis will begin as soon as June or as early as May.

A large contributor to the growth of the balance sheet has been the central bank’s asset purchasing program. It is scheduled to expire in March. The Fed used to buy $120 billion in Treasury and Mortgage securities per month, but it has started tapering.

Fed officials should begin to look at how to reduce the balance sheet after that program ends. The Fed replaces maturing securities with market-purchased securities. The Fed could alter that process and change other things, such as changing the length of securities held.

Swonk stated that “the fact they’re talking to reduce the balance sheet while still adding it to it is somewhat inconsistent.” She expects that there will be some dissent this week and at least one Fed member (such as James Bullard from St. Louis Fed) could press for immediate ending of the purchase.

Swonk indicated that the Fed is still arguing about how aggressive it should go with rate rises. Some market professionals speculate that the Fed may move quickly with a half percent rate hike in March. However, consensus is for a quarter of a point increase.

If the Fed moves on its balance sheet simultaneously it raises rates, then the Fed will be accelerating the pace of tightening. Swonk stated that every $500 billion in the balance sheet equals 25 basis points more tightening. They talk about reducing it by $100 billion per month. She said they could go much faster.

Market reaction

Cabana stated that he believes 70% to 80% will be due to Fed’s tighter policies. Cabana said that he spoke with investors and was most shocked to learn the Fed discussed shrinking its balance sheet.

It was very telling. It was an addiction market to Fed ‘put and the belief that Fed always has your best interest at heart.” he stated. The notion that the Fed could cause market damage was absurd.

Barry Knapp, head of research at Ironsides Macroeconomics, said the stock market’s decline was not a surprise and that the 11% drop in the S&P 500 as of Monday, was consistent with the average decline after other Fed tightening moves.

He said that the end of quantitative easing after the financial crisis was the beginning. There were 8 instances in which there was an average 11% decrease between 2010-2018.

“We need to stabilise in here. Jerome Powell’s comments here are not likely to cause more problems. We are currently looking at starting to reduce the balance sheet. The real doves all agreed that we must start. He said that inflation is now a problem. “The growth outlook isn’t deteriorating and the market is expected to stabilise,” he said.

Knapp stated that one of the most worrying components of inflation was rent and housing prices, which are likely to increase. Knapp stated that if the Fed decided to remove mortgage-backed securities, it would slow down inflation overall.

He said that if the government wants to improve financial conditions and slow inflation they should do so by reducing housing-related inflation. Goods prices will drop, the supply chain will open. The increase in rent and housing prices is only going to continue. Already, it’s above 4%. In this instance, the primary channel of slowing inflation is through the housing market.

Mike Robinson
Mike covers the financial, utilities and biotechnology sectors for Street Register. He has been writing about investment and personal finance topics for almost 12 years. Mike has an MBA in Finance from Wake Forest University.