January 10, 2022

Fed rate hike: January or March?

 In principle, so far the Fed is following the plan that was outlined earlier. Namely: first, reducing the quantitative stimulus program to zero, then raising the rate. However, it should be recalled about the last meeting of the Bank of England, which unexpectedly raised the rate with an incomplete and even undiminished QE program. It turns out that such a scenario is quite possible, although at first glance it seems rather strange. It turns out that the central bank continues to stimulate the economy while tightening monetary policy. Nevertheless, the central bank knows better what to do and how to do it. Therefore, many experts are now wondering if there will be a similar surprise from the Fed in January? Especially if it turns out this week that American inflation continued to accelerate in December. Recall that most of the forecasts say that the consumer price index will go above the 7% mark. In general, no matter which way you look, only "hawkish" actions are visible everywhere, which the Fed may take in the near future.

It should also be noted separately that the Fed in 2022 may begin to reduce its balance sheet, which swelled during the pandemic to $ 8.76 trillion. This is another way to tighten monetary policy and cool down the economy, as well as to withdraw excess liquidity, which was required to stimulate the economy in difficult times. However, likely, the Fed will not rush to raise rates until it completes QE. This was openly stated by one of the members of the Fed monetary committee, Christopher Waller. He reported: "The whole point of accelerating the curtailment of asset purchases is that it would be possible to move to raise the key rate at the March meeting." Thus, it is unlikely that the Fed will follow in the footsteps of the Bank of England. Separately, it should also be noted the state of the US labor market. The unemployment rate at the end of December decreased to 3.9%, and NonFarm Payrolls increased by 200 thousand. Although forecasts predicted a greater increase in Non-farm, this is, in any case, an increase. Thus, at the moment, we can say that the US labor market continues to recover, and the regulator is not worried about it as much as before. In any case, it is ready to abandon its further stimulus, in favor of slowing down inflation, which has reached its 40-year highs. Moreover, as we can see by the end of December, the coronavirus pandemic and its omicron strain did not have a devastating impact on the American economy. Business activity indices declined in the US last month but declined moderately. Therefore, it is unlikely that the US economy will face a strong recession that would require a new stimulus. Based on this, all factors speak in favor of further tightening of monetary policy.