OPINION
Market Rating Before FOMC MeetingJan 31
Countdown to the FOMC Decision - Rate Hikes on Deck
As global inflationary pressures intensified under the shadow of the Russia–Ukraine war, all eyes are on the first meeting of the Federal Open Market Committee (FOMC). As a result of the first meeting of 2022, a 25-bps-rate-hike is expected from the FOMC in line with its guidance on rates in January.
In January, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March. Besides, Federal Discount Rate was kept as 1/4 percent. "The Committee expects it will soon be appropriate to raise the target range for the federal funds rate," the FOMC statement noted, adding that the balance sheet reduction will be started after the process of increasing the fund target range begins. Subsequently, Fed Chair Jerome Powell also expressed his support for a 25-basis-point-hike in his statement, noting that the labor market is in an extremely tight situation and the economy no longer needs a very high degree of monetary policy support.
Following the decision, non-farm payrolls increased market forecasts in January and February by being registered as 467k and 678k, respectively. And increased the rate hike forecast to 50 basis point for a short period of time. Consumer price index (CPI), which reached a 40-year peak of 7.9 percent on an annual basis in February, also contributed to that rise. However, Russian – Ukrainian war is an important obstacle for the Fed to act aggressively. It is not yet clear how the Russian economy, which is targeted by western countries, especially the United States, with strong sanctions, will affect the economic outlook of the United States depending on the damage to supply chains. On the other hand, there is also an inflationary pressure caused by high levels in energy and food commodities, especially crude oil, which has reached a peak of 14 years due to supply concerns caused by the crisis.
To sum up, at the March meeting, the Committee is likely to refrain from an aggressive tightening policy in order to monitor the risks of the Ukrainian crisis to the US economy for some time. In addition, we believe that the Committee will make its first interest rate increase since 2018 by 25 basis points in order to keep domestic demand and inflation expectations under control, assessing that the scope of monetary policy impact on the supply elements will be limited for the inflation outlook.
Last but not least, the Economic Projections report, which will be published with the decision of the meeting, is very significant. The report will set out the Committee's forecasts for rate hikes, growth, inflation and unemployment rates in 2022 and 2023. Also, Chair Powell will hold a press conference at 20:30 (GMT+2), and his communication will be followed as a signal of the balance sheet reduction process in the context of the Fed's flexibility in bringing inflation to the path it is targeting.
In January, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March. Besides, Federal Discount Rate was kept as 1/4 percent. "The Committee expects it will soon be appropriate to raise the target range for the federal funds rate," the FOMC statement noted, adding that the balance sheet reduction will be started after the process of increasing the fund target range begins. Subsequently, Fed Chair Jerome Powell also expressed his support for a 25-basis-point-hike in his statement, noting that the labor market is in an extremely tight situation and the economy no longer needs a very high degree of monetary policy support.
Following the decision, non-farm payrolls increased market forecasts in January and February by being registered as 467k and 678k, respectively. And increased the rate hike forecast to 50 basis point for a short period of time. Consumer price index (CPI), which reached a 40-year peak of 7.9 percent on an annual basis in February, also contributed to that rise. However, Russian – Ukrainian war is an important obstacle for the Fed to act aggressively. It is not yet clear how the Russian economy, which is targeted by western countries, especially the United States, with strong sanctions, will affect the economic outlook of the United States depending on the damage to supply chains. On the other hand, there is also an inflationary pressure caused by high levels in energy and food commodities, especially crude oil, which has reached a peak of 14 years due to supply concerns caused by the crisis.
To sum up, at the March meeting, the Committee is likely to refrain from an aggressive tightening policy in order to monitor the risks of the Ukrainian crisis to the US economy for some time. In addition, we believe that the Committee will make its first interest rate increase since 2018 by 25 basis points in order to keep domestic demand and inflation expectations under control, assessing that the scope of monetary policy impact on the supply elements will be limited for the inflation outlook.
Last but not least, the Economic Projections report, which will be published with the decision of the meeting, is very significant. The report will set out the Committee's forecasts for rate hikes, growth, inflation and unemployment rates in 2022 and 2023. Also, Chair Powell will hold a press conference at 20:30 (GMT+2), and his communication will be followed as a signal of the balance sheet reduction process in the context of the Fed's flexibility in bringing inflation to the path it is targeting.
