Sun. May 29th, 2022

The Federal Reserve will confirm its plans to raise interest rates in March for the first time since the start of the pandemic, as the US Federal Reserve faces a more aggressive rate towards monetary tightening of tough inflation.

Fed officials will meet this week for their first 2022 policy meeting, the first since the central bank made its fight against rapid US consumer price growth its top priority.

The Fed has hardened its rhetoric over the past few weeks on the risks of high inflation, with Chairman Jay Powell making it a “this month”serious threat”To a sustained economic expansion and a strong recovery of the labor market.

Its top policymakers have also made it clear that they are prepared to act vigorously to ensure that inflation does not become entrenched, by considering raising interest rates.faster or at a faster pace”Than expected and the Fed’s enormous balance sheet has shrunk rapidly this year.

Coupled with growing evidence that inflation is expand and the labor market is heal quickly, the central bank is well placed to move in March, many Fed officials and Wall Street economists argue.

“The labor market is tight, wage inflation has risen and price inflation has risen significantly,” said Peter Hooper, global head of economic research at Deutsche Bank, who has worked for the Fed for nearly three decades. “Do we still have to be at a crisis level of support for the economy? No.”

In addition to confirming that the Fed may raise rates soon, economists are also seeking more clarity on the way forward after the first adjustment. The central bank’s policy statement will be released on Wednesday, followed by a press conference with Powell.

Fed viewers are divided over whether the central bank will also announce an immediate end to its asset buying program, which currently ends in March. Powell confirmed that timeline earlier this month, but according to ING, there is “no reason” for the central bank to buy any additional bonds.

In December, Fed officials merged about three quarter-point increases in 2022, with another three for 2023 and two in 2024. This month, however, an increasing number of policymakers laid the foundation for more.

One of the most hawkish officials and a voting member on the Federal Open Market Committee this year – James Bullard of St Louis – said he supports four rate hikes this year. Christopher Waller, a governor, said five could be appropriate if inflation remained high.

Jason Thomas, head of global research at Carlyle, has gone so far as to argue that seven this year is not “unlikely”.

“What the Fed is going to prepare us for is for the potential for interest rate hikes at every meeting after January,” he said.

Some speculate the Fed may even consider raising interest rates by half a percentage point in March – something it has not done since May 2000.

Bill Nelson, former deputy director of the Fed’s Monetary Affairs Division, said the central bank should “prepare the public” for that possibility this week.

“Responding to the current circumstances by being gradual is only going to leave them more and more behind the curve and will eventually end up with a very sharp correction,” says Nelson, who is now chief economist at the Bank Policy Institute. “So many people are taking too much of a signal of the very gradual sharpening pace last time and not thinking about what it means to take a policy position that is apt to curb the economy and bring down inflation.”

However, Jan Hatzius, chief economist at Goldman Sachs, whose forecast is in line with market expectations for four quarter-point rate hikes in 2022, said such a dramatic move was unlikely and unnecessary.

“The question is actually more, do you see a series of hikes at successive meetings?” he told the Financial Times during an event hosted by the Chicago Council on Global Affairs on Thursday. “It’s a possibility.”

A sudden swing in the direction of significantly more false Fed policies threatening to hurt the growth outlook is the “significant downside risk” for financial markets this year, Holly MacDonald, chief investment officer at Bessemer Trust, warned.

“Success is not just the death of this acute inflation. Success is getting away [zero], ”Says Matt Toms, Chief Investment Officer at Voya Investment Management, referring to the current level of the federal fund rate. He added that the Fed should only increase rates gradually, as inflation and growth are both expected to slow later this year.

Stock markets have fluctuated sharply in recent days as investors devoured the implications of faster Fed tightening, with global equities suffering biggest declines last week in over a year.

Economists also expect further details this week on the Fed’s plans to his balance sheet shrinks, which has more than doubled in size since early 2020 and is now just under $ 9tn.

In its first in-depth discussion on the subject in December, the FOMC agreed to a faster reduction than the pace set after the 2008 global financial crisis.

Oxford Economics chief economist Nancy Vanden Houten predicts the Fed will eventually set $ 30 billion monthly redemption limits for treasuries and $ 15 billion for agency-backed securities in the third quarter and later increase them to $ 60 billion and $ 30 billion, respectively. .

At that point, the balance sheet would fall below $ 6 billion by 2025, according to her estimates.

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