Fed expected to back first rate hike of pandemic era in March
The U.S. central bank is set to confirm its first rate hike plan since the onset of the pandemic in March as it charts a more aggressive course of monetary tightening in the face of sticky inflation.
Fed officials will meet this week for their first policy meeting of 2022, the first since the central bank made tackling rapid U.S. consumer price growth a priority.
The Fed has intensified its rhetoric in recent weeks on the risks posed by high inflation, which Fed Chairman Jay Powell this month called a “serious threat” for a sustained economic expansion and a strong labor market recovery.
Its top policymakers also made clear that they are willing to act forcefully by considering raising interest rates to ensure inflation does not become entrenched.faster or faster” exceeded expectations and rapidly reduced the Fed’s massive balance sheet this year.
“The labor market is tight, wages are up, prices are up,” said Peter Hooper, head of global economics research at Deutsche Bank, who has worked at the Fed for nearly 30 years. “Do we still need crisis support for the economy? No.”
In addition to confirming that the Fed is likely to raise rates soon, economists are looking for more clarity on the path forward after the first adjustment. The central bank’s policy statement is scheduled for Wednesday, followed by a news conference with Powell.
Fed watchers are divided on whether the Fed will also announce an immediate end to its asset-purchase program, which is currently set to end in March. Powell confirmed the timetable earlier this month, but according to ING, there is “no reason” for the central bank to buy any additional bonds.
In December, Fed officials combined roughly three 25-basis-point increases in 2022, another three in 2023, and two in 2024.This month, however, a growing number of policymakers have Foundation More.
One of the most hawkish officials and voting member of the FOMC this year — St. Louis’ James Bullard — said he supports four rate hikes this year. Gov. Christopher Waller said five may be appropriate if inflation remains high.
Carlyle’s global head of research, Jason Thomas, doesn’t even think seven times this year is “impossible.”
“What the Fed is preparing for us is the possibility of a rate hike at every meeting after January,” he said.
Some have speculated that the Fed may also consider raising rates by half a percentage point in March — something it hasn’t done since May 2000.
Bill Nielsen, former deputy director of the Federal Reserve Committee’s Monetary Affairs Department, said the Fed should “prepare” for that possibility this week.
“Tackling the current situation in a gradual way will only leave them further and further behind, which will end up in a very sharp correction,” said Nielsen, now chief economist at the Banking Policy Institute. “A lot of people from the last very gradual tightening. Too many signals are being taken in the pace without considering what it means to adopt a policy stance appropriate to contain the economy and lower inflation.”
However, Goldman Sachs chief economist Jan Hatzius’ forecast is in line with market expectations for four rate hikes in 2022, saying such a drastic move is neither likely nor necessary.
“The question is really more, are you seeing a string of rate hikes in successive meetings?” he told the Financial Times on Thursday at an event hosted by the Global Affairs Council in Chicago. “It’s a possibility.”
Holly MacDonald, chief investment officer at Bessemer Trust, warned that a sudden shift in Fed policy to a hawkish policy that could dent growth prospects is the “major downside risk” for financial markets this year.
“Success is more than stifling this wild inflation. Success is moving away [zero],” Matt Toms, chief investment officer of fixed income at Voya Investment Management, referring to the current level of the federal funds rate. He added that with both inflation and growth expected to slow later this year, the Fed should only Gradually raise interest rates.
Stocks have been wildly volatile in recent days as investors have priced in faster tightening by the Federal Reserve, with global stock markets battered. biggest drop over the past year or so.
Economists also expect more details on Fed plans this week Shrinking balance sheet, which has more than doubled in size since the start of 2020 and is now just under $9 trillion.
In its first in-depth discussions in December, the FOMC agreed to cut rates at a faster pace than it set in the wake of the 2008 global financial crisis.
Nancy Vanden Houten, chief economist at Oxford Economics, predicts that the Fed will finally set a monthly redemption cap for Treasuries and $15 billion in agency mortgage-backed securities in the third quarter, It will then be raised to $60 billion and $30 billion, respectively.
At this rate, the balance sheet will fall below $6 trillion by 2025, according to her estimates.