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Fed Meeting To Tame Inflation

by Seerat Fayaz   ·  January 26, 2022   ·  

Fed Meeting To Tame Inflation

by Seerat Fayaz   ·  January 26, 2022   ·  

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Federal Reserve policymakers are likely to reveal plans for their first interest rate hike since 2018 and to discuss shrinking their bloated balance sheet as they seek to curb the greatest inflation in almost 40 years. After a two-day policy meeting Wednesday, the Federal Open Market Committee is very expected to keep its benchmark rate around zero while adhering to its plan to reduce asset purchases and end them in March. 

The unemployment rate in the United States has below 4% till the last month. And the FOMC is likely to announce that the economy is at or near full employment and that a first step toward higher interest rates may be acceptable soon, maybe at the March 15-16 meeting.

In their December “dot plot,” policymakers pencilled in three rate rises in 2022, and a number of Fed officials have favoured a March move. 

At the January meeting, it is predicted that rates would stay stable and the present pace of tapering will be continued. The major purpose of the meeting is for the FOMC to signal a March rate rise and balance-sheet runoff this year, which we anticipate it to do carefully, underlining the uncertainty and downside risks to growth given that we are still in the midst of the omicron wave.

The FOMC is planned to conclude asset purchases in March, as Powell stated in his congressional testimony, while some economists believe the committee may consider halting bond purchases sooner. 

Statement by the FOMC is expected to proclaim that the US labour market has continued to make progress toward the Fed’s employment targets. That, when paired with above-trend inflation, the Fed’s accommodation is likely to be removed shortly. The particular language will offer some indication of the amount of commitment to March, with a mention of “next meeting” implying that the rate decision has already been taken. 

The announcement should make it apparent that a rate hike is on the way.

Despite demands for the Fed to hike interest rates by 50 basis points in March, most economists polled by Bloomberg did not believe that was likely. In a televised broadcast on January 13, Fed Governor Christopher Waller advocated against such a step, while he did not rule it out in the future if necessary. 

While the omicron variant has caused some weakening in recent economic indicators, with more employees absent owing to sickness, the FOMC may choose to disregard this and reiterate that economic and labor-market conditions remain favourable.

The statement may be changed to remove the Fed’s mandate to employ the “full range of instruments,” meaning that asset purchases will soon be off the table, hinting to the balance sheet’s ultimate winding down later this year. 

Monetary Policy Framework Previously, the FOMC authorised a statement on longer-run goals and strategy in January meetings, which it amended in August 2020 to emphasise its full-employment goal by requesting broad-based and inclusive changes. Despite considerable criticism, the approach is expected to be repeated with no revisions, as it did in January 2021.

Conference of the Press Powell will almost certainly be challenged on the Fed’s plans for normalising policy, but with Covid-19 still affecting the labour market, among other dangers, he may opt to be careful in his statements. He’ll almost probably be grilled about the Fed’s plans to decrease its $8.87 trillion balance sheet, which the FOMC is expected to discuss further at this meeting.Powell was not anticipated to be concerned about the recent stock market dip, but he might opt to underline that the Fed is continually monitoring global economic threats and that its policies are flexible and data reliant.

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