Despite high inflation, we don’t expect a policy move this week as it really is too soon to tell how the latest pandemic wave has impacted the economy. However, we expect the Fed to set the table for an end to quantitative easing and a first 25-basis point rate hike at their March meeting.
In addition, Fed'S Powell may well shed further light on the timing and potential pace of quantitative tightening, which we now expect to begin later this year.
Wells Fargo View:
All eyes are on the Federal Reserve next week as monetary policymakers conduct the first of the eight planned FOMC meetings for 2022. Interest rates have jumped since the FOMC last met on December 14th-15th.
The 10-year Treasury yield has risen 29 BPS since then, while the two-year Treasury yield has seen a similar move.
This move in US rates has come as markets and Fed-watchers have ratcheted up their expectations for tighter monetary policy in 2022. At the conclusion of the December 15th FOMC meeting, financial markets were priced for roughly two and a half 25-BP increases in the Fed funds rate in 2022. Since then, market pricing has shifted to four, 25-BP rate hikes in 2022. Our own forecast shifted from two rate hikes this year in our December outlook to four rate hikes in our latest forecast update.
Goldman Sachs' View
Goldman Sachs in a note said the "FOMC is likely to use its January meeting to hint at a March lift and to begin formulating a plan for balance sheet reduction."
They expect four hikes this year and the start of balance sheet reduction in July, which is roughly in line with the consensus.
Goldman Sachs economists say they're growing more concerned about inflation for two reasons
- Omicron is hurting the supply side, or at least prolonging the timeline to get back to normal
- Wage growth has been accelerating
"We see a risk that the FOMC will want to take some tightening action at every meeting until that picture changes. This raises the possibility of a hike or an earlier balance sheet announcement in May, and of more than four hikes this year," they write.
Previous FOMC Meeting:
The Federal Reserve kept interest rates unchanged, adding that it will aggressively dial back its monthly bond-buying program. Going forward, the Fed will be buying $60 billion a month in assets. That’s half the level prior to the November taper. Central bank officials also see three rate hikes in 2022.
The Fed is confident in adopting a more hawkish stance because inflation is nearing a four-decade high and the unemployment rate has fallen to near pre-pandemic levels, with firms eager to hire.