At first glance, this week’s FOMC meeting should be a non-event. After all, Fed Chairman Jerome Powell laid out the central bank’s timetable in unusually clear terms during his Senate confirmation hearing earlier this month, saying “As we move forward into this year … if things go as expected, we will normalize policy, which means we will end our asset purchases in March, which means we will raise rates over the course of the year. ‘year… At some point maybe later this year we’ll start to let the balance sheet crumble, and that’s just the path to normalizing politics.
Check out our primer on everything you need to know about the Federal Reserve!
Unsurprisingly, the market incorporated these and other comments into its outlook, with fed funds futures traders expecting about a 5% chance of a rate hike this week, but four full rate hikes from interest by the end of the year, with an outside shot at five or six. In other words, traders expect this week’s Fed meeting to be the proverbial “calm before the storm” of aggressive Fed tightening throughout the year.
Will the Fed end QE sooner?
From a purely macroeconomic point of view, the central bank is probably already behind the curve; after all, the unemployment rate is below 4% and inflation is at multi-decade highs, above 7%. In this context, why does the Fed continue to buy assets through its quantitative easing (QE) program, even though it is reducing these purchases quite aggressively? Indeed, in that same confirmation hearing, Powell already admitted that the Fed is “… knowing that the balance sheet is 9,000 billion dollars. It is well above what is needed.
While this is not our base case scenario, there is absolutely a risk that central bank views have shifted in recent weeks and that Jerome Powell and company may choose to end all asset buying immediately. assets, rather than waiting until March. In this case, we might see a weaker instinctive reaction from risky assets like currencies and higher-yielding indices, while safe-haven assets like bonds and the US dollar might catch some supply.
See our article on President Powell and his position as head of the Federal Reserve!
Where is the “Fed put”?
The “Fed Put” refers to the tendency of the US central bank to ease monetary policy (or push back the tightening schedule) in response to falling stock markets. Although far from official, many investors believe the Fed has an informal third mandate to ensure stocks don’t fall too sharply due to monetary policy decisions.
However, unlike the current environment, many historic occasions when the Fed raised its head have coincided with fears that the US economy is slipping into recession; instead, the overriding concern now is that the Fed will have to raise interest rates aggressively in response to inflation readings, possibly slowing growth in the distant future. In other words, the Fed probably isn’t worried about a looming recession, so the potential “Fed put” may be at much lower levels in major indices than we currently see, notwithstanding the current correction.
What to expect from the Fed
In view of the above, the most likely scenario is that the Fed is “sticking to the script”, leaving interest rates and the cut schedule unchanged. While some traders are no doubt hoping Chairman Powell will see troubled stocks and come to the rescue with dovish comments, a flat outcome from Wednesday’s monetary policy meeting could see risk-sensitive assets like stocks fall further. commodity currencies and stocks. That said, any hint of delay or hesitation on future interest rate hikes could help support battered risk assets, while an early end to QE could exacerbate the recent selloff.
Either way, traders will be hanging on every word from Fed Chairman Powell and the rest of the FOMC this Wednesday!
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