The Fed interest rate decision data is going to be released soon. The nation's economy is facing both high inflation and topsy-turvy financial markets. So, the Fed interest rate decision data could increase the interest rates for the first time in nearly four years as a part of a wider tightening of the usually relaxed monetary policy. In an action that is not very surprising, the policymaking group of the Federal Reserve said that a quarter-percentage point growth to the short-term borrowing rate is likely to happen. It will be the first increase since December of nearly four years ago. The statement of the Committee came following the highest level of inflation in nearly half a century. The Fed interest rate decision data is moving towards a less accommodative policy. This has been stated over the past few weeks.
But the financial markets in recent times have been very turbulent as the investors are worried that the Federal Reserve may tighten the policy even more than what is being expected by the experts. After the meeting of the Federal Open Market Committee, the statement did not give a specific time frame for when the Fed interest rate decision data will come. But there are indications that it can happen as soon as the meeting of the Federal Reserve in March. The statement was adopted unanimously without any dissent. Also, the Committee noted that the monthly bond-buying program of the Federal Reserve would be at the mark of $29 billion this month. This shows that the program will end in March at the same time as the release of the Fed interest rate decision data.
There was no major indication of when the Federal Reserve may start to decrease the bond holdings that have bloated the balance sheet to nearly ten trillion dollars. But, the Committee released a statement that outlined the principles for decreasing the overall size of the balance sheet. The statement is prefaced with the assumption that the Federal Reserve will significantly decrease the level of the holding of assets. The policy sheet also said that the benchmark funds rate is the main means of adjusting the stance of the monetary policy. The Committee also noted that the reduction in the balance sheet would happen after releasing the Fed interest rate decision data. They also said that it would be in the usual manner by adjusting how much of the proceeds of the Reserve Bank would be from the bond holdings. It will be decided how much will be reinvested and how much of the holdings will be permitted to roll off.
Markets Are Also Awaiting the Fed Interest Rate Decision Data
Markets are also waiting for the decision of the Federal Reserve. Investors have been thinking that the central bank would initiate the first of many rate hikes over the year. They are factoring in an aggressive schedule than the FOMC officials had said in their outlook in December. At that time, the Committee had outlined only a few basis point moves this year. But the market thinks that there will be a few more, according to the FedWatch tool from CME that calculates the probabilities through the futures market of the fed funds. The traders expect a funds rate of 1% by the end of this year. At present, the rate is at a near-zero range. The officials of the Federal Reserve are concerned about the ongoing inflation in recent times. This is after months of saying that the increase in prices was temporary.
The consumer costs have increased by more than six percent from a year ago. The durability of such inflation has caused the officials to redraft a strategy that has given the simplest monetary policy in the history of the Federal Reserve. The central bank decreased the benchmark rate to a range of around 0.25% in the early days of the pandemic and has been buying billions of dollars in mortgage-backed securities and Treasurys each month. The bond-buying program is also known as quantitative easing sometimes. It took the total assets of the Federal Reserve to nearly ten trillion dollars on the balance sheet. Powell said that the Federal Reserve would wait for some time before permitting some of the proceeds from the sale of the bond holdings to run off each month while reinvesting the rest of the amount.
In its current scheme of things, the Federal Reserve reinvests all the proceeds from the sale of the bond holdings. Goldman Sachs said some days ago that it expects the Federal Reserve's balance sheet reduction to start in June at a speed of more than ninety billion dollars a month. This is nearly double the speed of the previous move of a runoff that happened many years ago. Michael Pearce, the senior US economist at Capital Economics, said, "The Fed's announcement that it will 'soon be appropriate' to raise interest rates is a clear sign that a March rate hike is coming. The Fed's plans to begin running down its balance sheet, once rates begin to rise, suggests an announcement that could also come as soon as the next meeting, which would be slightly more hawkish than we expected."
Chairman Jerome Powell said, "I think there's quite a bit of room to raise interest rates without threatening the labor market. With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate. Part of this will be the Fed moving away from a very high accommodative policy to substantially less accommodative policy over time to a policy that's not accommodative. The balance sheet is substantially larger than it needs to be," Powell said. "There's a substantial amount of shrinkage in the balance sheet to be done. That's going to take some time. We want that process to be orderly and predictable."
Stocks Fall Before the Release of the Fed Interest Rate Decision Data
The US stocks declined at the start of this year on worries about how rapidly the Federal Reserve may announce the Fed interest rate data. The markets reacted because the Chairman of the Federal Reserve has continuously underlined the persistence of the economy and the underlying strength of the economy. Citing that, he had declined to rule out more aggressive measures to tighten the rates as required. The S&P 500 index went up by more than a couple of percentage points in a single day. The stocks got sold off through the news conference of the Chairman of the Federal Reserve. It led to a closure of about 0.15% below the start of the day. The Nasdaq Composite had taken a major blow in the sell-off this month. It finished the day with only a little change.
The yields on the Treasury securities increased as the Chairman said that a decision regarding the policy would be made on decreasing the nearly ten trillion portfolios of mortgage-backed securities and US government bonds that are kept by the Federal Reserve. The dollar increased by 0.5% to its highest mark in a month against a basket of currencies of its main trading partners. Powell was "trying to balance the fear factor, but at the same time he's talking about inflation might get worse, he's talking about the Fed might have to use more tools, he's talking about the balance sheet reduction," said Peter Cardillo, a chief market economist with Spartan Capital Securities in New York. "The bottom line is his response is causing the market to fear the uncertainty."
The Fed interest rate decision data will hinge on how inflation behaves in the coming days. The Chairman of the Federal Reserve has said that the officials are hoping that much of the changes will come as the effects of the pandemic eases. This will permit them to do fewer functions through narrower monetary policy.