The Fed fulfills the script: an end to the stimulus and a rate hike “soon”

The Federal Reserve (Fed) has already made public the conclusions of its last meeting: it maintains interest rates between 0% and 0.25%, but warns that “with high inflation, soon it will be appropriate to raise the rank“. In addition, the institution has announced that it will continue to reduce its debt purchases by at least 30,000 million dollars a month. Although the key is its notice for the coming months, because it anticipates that “the committee will continue to monitor the situation and would be prepared to tighten monetary policy if risks to job and inflation targets emerge.”

The consensus expected, as it has happened, that this meeting does not end with a rate hike and believes that this measure will be implemented in March. After this, they estimate that Three other increases will follow during the year 2022. Therefore, the main objective of today’s meeting would be to prepare the market for the decisions that are coming soon.

The Federal Reserve is currently trying to curb at all costs the high inflation of 7%, the highest since June 1982. In this sense, Powell has been clear stating that his priority is to guarantee price stability and, for this, he is willing to raise rates for longer. At the same time, the institution wants to prevent this measure from causing a accelerated exit in the markets, who are currently in a downward spiral, caught between the economic slowdown and the fear of a Russian conflict with NATO.

In any case, experts say that the most likely scenario is four hikes of 25 basis points distributed throughout the year and with the first this March. In this way, the Fed statement could be preparing the ground to start the fourth month of the year.

The end of the stimulus era

At the press conference following the report, Jerome Powell, the chairman of the Fed, confirmed that the era of stimulus is over. “The best way to keep the economic expansion is to ensure stability of prices, and for this the best mechanism is interest rates”, he advanced.

The reduction of the balance sheet will be done gradually, once the rate increase process has begun, and the process will be done based on not renewing the debt that reaches the maturity date, so that the total is reduced with each expiration. Even so, the specific data on how much debt will come out of its balance will be given “in the coming months.”

“We have not yet made the decisions, we have not even talked seriously about it,” he said, apologizing for not being able to give more details. The only thing it can confirm is that “the balance sheet is bigger than it needs to be,” and its downsizing will start later in the year. “We will discuss its reduction in one or two meetings”, pointing to June as the date on which there will be a clearer calendar. But the Fed chairman has repeatedly insisted that rate hikes will be his main tightening tool.

the virus is still there

Regarding the Fed’s macroeconomic analysis of the situation, the central bank points to high inflation. “Imbalances of supply and demand related to the pandemic and the reopening of the economy have continued to contribute to high levels of inflation”. It also warns that risks to the economy persist, that “it continues to depend on the coronavirus” and whose variants can seriously affect the recovery. However, defends that economic and employment indicators have continued to strengthen and that financial conditions “remain accommodative, in part due to political measures to support the economy and the flow of credit.”

After learning of the statement, the markets have turned downwards significantly (decreases of up to 0.7% from intraday highs), but the main US indices continue to remain positive on a day of significant rebounds on Wall Street.