Analysts expect that the Federal Reserve will signal its intention to implement its first interest rate hike this March. The agency will also implement other policy tightening activities, which will now reverse easy money programs during the pandemic.
Fed To Implement Interest Rate Hike By March
The Federal Reserve began its meeting earlier, which will conclude Wednesday afternoon. Observers are expecting the central bank to announce its commitment to implement policy tightening measures to combat inflation.
The US stock market is currently in the midst of a correction. This is the reason why the agency would like to accelerate its interest rate hike plans to March instead of later.
Mark Cabana, the US short rate strategist for Bank of America, agrees with the move. “We don’t expect them to sound dovish,” he said. “The [bond] market seems to be reacting to the drop in equities, plus the geopolitical tensions,” Cabana added.
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He also said that “maybe the Fed sounds not as hawkish as they otherwise would have. But we don’t think the Fed is going to come out and tell the market it’s wrong for pricing in four rate hikes this year.”
Federal Agency Caught Up in Inflation
After more than a year of insisting that the current inflation is transitory, the Fed now finds itself battling with the highest inflation rates in 40 years.
The loose monetary policy during the pandemic, including near-zero interest rates, boosted inflation to 7%, the highest since 1982.
Cabana expects the Fed to announce its first interest rate hike during its next meeting in March. The agency made a similar comment in 2015, and then promptly raised interest rates a month after.
Stock Market Bloodbath
Meanwhile, the bloody stock market sell-off, where many investors abandoned growth stocks in favor of value ones, is ongoing. The S&P 500 fell into correction rates as early as Monday, posting a 10% decline from its previous record close.
However, tensions in Eastern Europe and the spiraling high cost of oil prices are keeping market pressure on.
Diane Swonk, the chief economist at Grant Thornton, said that the Fed’s messaging remains limited. “What they will have to do is say we will respond as conditions warrant.
We have inflation to deal with, and even with what we’re seeing, financial conditions are too loose. That’s the only message they can give at this time,” she observed.
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Powell To Adopt Hawkish Tone And Signal Interest Rate Hike
Fed Chairman Jerome Powell will brief the media after their 2 pm meeting Wednesday. Many expect the Fed chief to sport a more hawkish tone.
Even if he says that the agency will use every tool they have to fight inflation, the markets remain down. “I don’t think they’re going to be spooked by this.
They need to tighten financial conditions so they can have a better handle on inflation. I just don’t think the Fed is going to be surprised by this, Cabana added. “Nor do I think they’re going to feel the economy is going to fall off a cliff.”
In addition to the interest rate hike, the Federal Reserve also plans to reduce their $9 trillion balance used in buying bonds.
This activity aimed to prop up the economy but has outlived its usefulness. Many strategists expect the wind-down to begin in May or June this year.
Watch the CNBC Television video reporting that markets expect the first rate hike to come in March:
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