Fed to use next policy meeting to get ducks in a row for March liftoff

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Federal Reserve officials will use their first meeting of 2022 in ten days to lay the groundwork for moving from their very easy money position during the pandemic toward more normal policy.

Officials have now been silent for about two weeks as usual before a meeting in order to prepare for their interest rate setting meeting.

In a flurry of talk over the past two weeks, the central bank’s hawks and doves seem aligned on the way forward. US inflation is too high, the unemployment rate is below its neutral rate, and economic momentum should be strong once the omicron wave of the coronavirus passes.

See: Fed’s Harker sees “good amount of tightening” this year

“We have heard from a lot of officials at this point. There seems to be broad agreement that they will raise rates in March,” said Matthew Luzzetti, chief US economist at Deutsche Bank, in an interview. “There is a broad consensus that quantitative tightening should start soon after the start of the rate hike,”

“The most important talking point at the January meeting will be further guidance on the timing for starting quantitative tightening and the eventual monthly pullback we can expect,” Luzzetti said.

They will want to get closer to final decisions on these issues, he added.

The Fed will continue to buy Treasuries and mortgage-backed securities until mid-March.

This week, Fed officials threw wet blankets on speculation by some economists that the central bank would decide to suddenly end its asset purchases in January.

In a speech on Friday, New York Fed President John Williams gave every indication that the Fed will stick to the bond-buying reduction schedule adopted in December “and will not end the easing. quantitative in early January even as it prepares to raise rates in March.” said Krishna Guha, Vice President of Evercore ISI, in a research note.

See: Fed’s Williams sees inflation falling this year, helped by slowing growth

Deutsche Bank’s Luzzetti thinks the Fed will announce the balance sheet reduction in July.

He expects the Fed to initially allow $20 billion in Treasuries and $15 billion in mortgage-backed securities to run each month and increase those monthly drawdowns to $60 billion and $45 billion. by the end of the year.

The Fed will also allow all Treasuries in its portfolio to flow, he said. In total, this represents a reduction of $560 billion this year. A rule of thumb from the last tightening cycle in 2017 suggests that equates to about a 3-quarter hike in fed funds rates, but that’s a rough estimate, Luzetti said.

During the pandemic, the Fed doubled its balance sheet to about $8.8 trillion.

The highest US inflation figures in 40 years and a steady decline in the unemployment rate have forced the Fed to back away from the accommodative policy in place since the start of 2020 when the pandemic hit.

Oren Klatchkin, an economist at Oxford Economics, predicts four quarter-point rate hikes this year and the start of a balance sheet reduction by the middle of the year.

He said there would be a winter economic downturn due to the spike in omicron cases, but said activity would return in the spring. This year should still see “solid” economic growth, he added. U.S. GDP is likely to top a 5% rate in 2021, the fastest pace in 30 years, economists have said.

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