Federal Reserve Chair Jerome Powell spoke at the Re-Nomination Hearing of the Senate Bank, Housing, and Urban Affairs Commission on Capitol Hill, Washington, USA, on January 11, 2022.
Graeme Jennings | Reuters
The Federal Reserve is expected to push interest rate hikes this week, consider tightening other policies, and overturn the simple policies it has implemented to combat the pandemic.
The Federal Reserve will begin a two-day meeting on Tuesday, and on Wednesday afternoon, the central bank is expected to issue a new statement demonstrating its determination to combat inflation. Against the backdrop of intense stock market adjustments, Fed officials are expected to say they are ready to raise the federal funds rate from zero in March.
“I don’t think they sound dovish,” said Mark Cabana, head of the Bank of America’s US short-term interest rate strategy. ” [bond] The Fed may sound less hawkish than it would otherwise, as markets appear to be reacting to falling stock prices and geopolitical tensions. But I don’t think the Fed will tell the market that the pricing for the four rate hikes this year is wrong. “
The Federal Reserve has found itself in the first major battle against inflation in decades after two years of very simple policies implemented to counter the economic and financial implications of the pandemic. rice field. December Consumer Price Index It has risen by 7%, the highest since 1982.
In a statement this week, Mr Kabana said the Fed could indicate that the first rate hike since 2018 could be in March, the next meeting. In 2015, he made a similar comment in a statement a month before the first rate hike after the financial crisis.
The sale of the stock market has made the Fed’s job more difficult, if anything. S & P 500 Soaked in the correction area on Monday It fell 10% from its record closing price before the huge daytime market reversal. The Fed must be aware of these risks as the pandemic continues and Russia threatens military action against Ukraine.
“What they have to do is respond to the situation. We have inflation to deal with, and even what we see, the financial situation is too loose. This is the only message they can give at this time. ” Grantsonton’s Chief Economist, Dyan Swonk.
Powell explains to the media as usual after the Federal Reserve issues an ET statement at 2:00 pm. Powell’s tone is also expected to sound hawkish.
“I think he’ll say every meeting is live and he’ll use every tool to deal with inflation. S & P 500 10% down. “It’s still up 15% from last year,” said Cabana. “I don’t think you’ll be surprised by this. They need to tighten their finances to handle inflation well … the Fed I don’t think this will surprise me, and I don’t think they will feel that the economy will fall. “From the cliffs.”
Other policy tightening
The Federal Reserve is also discussing reducing the nearly $ 9 trillion balance sheet, which more than doubled during the pandemic. At the December meeting, central bank officials discussed the balance sheet and some strategists expect the dissolution to begin in June or as early as May.
The central bank’s asset purchase program, scheduled to end in March, has contributed significantly to the size of the balance sheet. The Fed was buying $ 120 billion in Treasury and mortgage securities a month, but it’s slowly declining.
At the end of the program, Fed officials are expected to begin considering how to shrink their balance sheets. The Fed is currently replacing maturity securities with market purchases. It may change its operation, change the term of the securities it holds, and make other moves.
“The fact that they are reducing and adding balance sheets at the same time is a bit inconsistent,” Swonk said. As such, she anticipates that this week’s meeting could be challenged and that at least one Fed member, such as St. Louis Fed President James Bullard, could demand that the purchase be terminated immediately. I am.
Mr. Swonk also said there was debate about how aggressively the Fed should tackle rate hikes. Some market experts speculate that the Fed could move quickly out of the gate with a 0.5 percentage point hike in March, but the consensus is a quarter point hike.
By raising interest rates and moving the balance sheet at the same time, the Fed will accelerate the pace of tightening. Squonk said it deserves a tightening of 25 basis points for every $ 500 billion in the balance sheet. “They’re talking about saving it $ 100 billion a month. They can go fast and easy,” she said.
Market reaction
Mr Cabana said he expects 70% to 80% of stock sales to be due to the Fed moving towards stricter policies. He said he was talking to the investors who were most surprised that the Fed was discussing shrinking its balance sheet.
“It was telling me. This is a market that is crazy about the Fed’s” put “and has the belief that the Fed always has your back,” he said. “The idea that the Fed could hurt the market was immeasurable.”
Barry Knapp, head of research at Ironsides Macroeconomics, said the stock market decline was not surprising, with the S & P 500’s 11% decline as of Monday consistent with the average decline after other Fed tightening moves. Said that.
Starting with the end of the first quantitative easing program after the financial crisis, he said there were eight cases between 2010 and 2018, all declining by an average of 11%.
“We need to be stable here. I don’t think there are many. [Fed Chair] Jerome Powell can be said to make things worse here. He is considering starting to reduce the balance sheet. He said that all real pigeons we have to start. Inflation is now a problem, “he said.” The market will stabilize because growth prospects haven’t deteriorated. “
According to Nap, one of the most worrisome factors for inflation is rent and housing costs, which are expected to rise. He said that if the Fed moved to remove mortgage-backed securities from its balance sheet, it would generally help slow inflation.
“If they want to tighten their finances, they want to slow inflation. The biggest contributor to inflation in 2022 will be housing-related inflation,” he said. “Commodity prices will fall and supply chains will disappear. But house and rental prices will continue to rise. It’s already over 4%. To delay inflation in this case. The FRB’s main channel is the housing market. “
