With the consumer price index rising by 7% in December from a year earlier and with unemployment moving below 4%, tomorrow’s Federal Open Markets Committee (FOMC) meeting couldn’t be more critical. This surge in the inflation rate is the highest since 1982.
What’s the FOMC and what is its meeting about?
The FOMC, currently chaired by Jerome Powell, holds eight (8) meetings every year where economic and financial conditions are reviewed and decisions based on monetary policies are taken. The committee also assesses the risks to its long-run goals of price stability and sustainable economic growth.
The Federal Open Market Committee (FOMC) is made up of 12 members — the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.
What Can Traders Expect from Tomorrow’s FOMC Meeting?
There are mixed reactions about what to expect from tomorrow’s meeting as financial analysts around the world have lent their voices to speculate on possible outcomes of the meeting.
At the January 2021 FOMC meeting, Federal Reserve Chair Jerome Powell continued his advocacy for generous fiscal stimulus. But this time around, Powell is bracing markets for precisely the opposite: Monetary policy tightening — interest rate hikes. With this in mind, it’s safe to assume that tomorrow’s meeting will have Powell pushing for multiple interest rate hikes this year.
What else should you look out for?
Anticipations for a March Interest Rate Hike:
Powell, at his Senate confirmation hearing, was quite clear when he stated that all things being equal, policies would be normalized and asset purchases would end in March. The implication of this is that interest rates will be raised over the course of the year.
Quantitative Easing Program might end by March:
After December’s FOMC meeting, the Federal Reserve announced it would keep buying treasuries and agency mortgage-backed securities (MBS) through to mid-March there ending its QE program by March.
Analysts also expect the Fed reserve to discontinue purchasing assets and announce an end to the QE program because employment costs rose in the third quarter of 2021 and this is expected to also be the case in the fourth quarter employment report that comes out on the 28th January 2022. These spikes indicate that inflation pressures remain on the high side longer than initially anticipated by the Fed Reserve. To this end, there is no need for the Fed to continue to purchase assets.
How Will The Markets React To The Interest Rate Hike?
The markets are already reacting to the interest rate hike as higher interest rates lessen demand for high-growth, low-profit companies. Last week, we saw S&P 500 fall more than 4% after hitting an all-time high on January 3. NASDAQ is down almost 8% as well. Cryptocurrencies were not left out as we witnessed the heavyweight; bitcoin losing about 25% of its market capitalization this month. Investors have spent the better part of the year selling bonds and stocks and this has caused the 10-year Treasury yield to rise from 1.5% at the beginning of the year to more than 1.8% right now.
Investors are treading carefully and observing how the Fed intends to move with the interest rate hike. We are certain they will be eager to see the outcome of the FOMC meeting.
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