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Fed: Scheduled meetings and rate hike

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There are two prominent facts regarding the Fed’s fight against inflation: More rate hikes in scheduled meetings than before, and direct bond sales from the portfolio. With the current dynamics, more than 3 rate hikes this year and a 50 bps increase in the March meeting seem to be on the table. The possibility of the Fed going out of schedule is very unlikely due to “hard landing” concerns. Because of these dynamics:

 

·        As we said above, the Fed is careful not to ignore the risk of a “hard landing” while tightening. This is the most important reason to follow employment dynamics. Geopolitical risks and the problems they will create will also seriously damage growth.

·        The Fed held an interim meeting in March 2020 and immediately lowered the interest rates to zero. With the sudden outbreak of the pandemic, the world was faced with a serious economic shock. For this reason, the Fed took immediate action and deployed reinforcements to help the economy recover. Will the same urgent moves be made for rate hikes? Low probability. Employment details and PCE are still determinants of inflation and economic activity. There’s not much time left for the March meeting, and the pandemic shock and the inflation rate are not risks to be tackled at the same rate. Inflation is a problem, and the market is pricing it accordingly to the aggressive tightening cycle.

·        QE is ongoing and will end in March as per schedule. The market has already taken the first interest rate step forward enough and filled the remaining margin by reaching the point of 7 rate hikes.

·        It will be very difficult to remove the dynamics that distort the economy and the market due to the current risks.

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·        New economic projections will come in March, there may be a faster arrival to the equilibrium interest point and higher projections in PCE. The funding rate was projected as 0.9% for 2022 and 2.1% for 2023 in December. Median economist expectations slipped to 1.25% for 2022 in the intervening period, so another rate hike was stuck in between. If this goes as 25 basis points, it means 5 rate hikes. According to the action in March, there is a possibility that the Fed will go beyond, and the futures funds are pricing in exactly this phenomenon in March.

·        Balance sheet reduction will likely be driven by bond sales directly from the portfolio from mid-year.

 

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