Fed: We will be lifting faster than last time

2022-02-16 21:01

publication
2022-02-16 21:01

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The pace of increases in the federal funds rate should be faster than in the previous, long-stretched cycle, according to the records of the January meeting of the Federal Reserve authorities.

Since the January meeting of the Federal Open Market Committee (FOMC), speculation has intensified on the market that the US central bank will finally start normalizing an extremely loose monetary policy. It is basically a foregone conclusion that in two weeks the Fed will expire its bond purchase program (QE – colloquially known as the “money reprint”) and will make the first interest rate hike at the March FOMC meeting.

It has been going on for several days auction for the most shocking forecast of rate hikes in the US. Until recently, the futures market fully priced in the move by 50 bp. in March. Now the chances are half and half. Ie slightly over 50% for a 25 bp hike. and not much behind the move by 50 bp. The quotation of futures contracts shows that at the end of 2022 the market expects the federal funds rate in the range of 1.75-2.00%.

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Wednesday’s publication of the minutes of the January FOMC meeting did not bring much new information on this topic. We learned that only “a few” of the participants wanted a faster end to the “reprinting of money” and that “many” were in favor of starting the sale of mortgage bonds. However, there was little about the interest rates themselves.

– Compared to the conditions in 2015, when the Committee last started the process of retreating from expansionary monetary policy, most participants suggested a faster rate of increases in the federal funds rate range than in the post-2015 period
– we read in January “minutes”.

The previous cycle of tightening (or actually normalizing) monetary policy in the US was very restrained. The Fed has waited seven long years to break with its zero-interest policy, grasping at every pretext to keep the price of money at historically low levels. We didn’t get the first raise until December 2015. For a second raise we waited another year. Then it went a little faster: we got two raises in 2017 and four in 2018. All of them are 25 bp. Thus, the Fed took three years to raise rates from zero to 2.25-2.50%. And then in December 2018 he capitulated to the demands of the financial lobby and suddenly began to ease monetary policy.

However, the current situation is radically different to that of seven years ago. Back then, CPI inflation was close to the Federal Reserve’s 2% inflation target, and now it reaches 7.5% and is the highest in 40 years.
Back then, employers ruled the labor market, and now America is short of several million workers. Rapidly rising salaries will fuel the significantly elevated inflation also in the years to come. Powell and Co. are therefore facing a challenge that is much more difficult than their predecessors, Yellen and Bernanke.

– The participants emphasized that the correct path of monetary policy will depend on the development of economic and financial events and their implications for risk and economic prospects – the January “minutes” offer us such classic fedom. It does not sound like a declaration of the central bank’s determination to suppress over 7% CPI inflation.

Also, a direct reaction of the market would suggest that the minutes of the January FOMC meeting did not feed the monetary hawks. The dollar slightly weakened against the euro and gold prices moved up. On the other hand, sentiment on Wall Street improved, with the previously declining S & P500 turning green, and the Nasdaq recovered most of the initial losses.

Krzysztof Kolany

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