January Statement Likely Signals Rates May Hike at Its Next Meeting – Wells Fargo

The Federal Reserve, at the January meeting, will likely signal that it could raise the fed funds rate as soon as its next meetingWells Fargo analysts explain. They add that any hint that the first rate hike is likely to come as soon as the March meeting boils down to Chairman Jerome Powell’s post-meeting statement and press conference.

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“The FOMC’s first meeting of the year is probably a quieter affair than its December meeting, when the Committee accelerated its plans to cut bond purchases and outlined a more aggressive political path for 2022. There will be no new roundup of economic projections, and we expect the FOMC to reaffirm its current pace of tightening, leaving asset purchases on track to end by mid-March.”

“With the FOMC increasingly worried about inflation, we will look in the statement after the January meeting for any indication that the federal funds rate could be raised at its next meeting on March 15-16. Such a suggestion could indicating that the labor market is close to maximum employment, the remaining criteria that the Committee has established for the first rate increase. We hope the statement and Chairman Powell at his press conference downplay the temporary slowdown in growth due to the most recent wave of the virus and highlight the overall strength of the labor market.”

“To avoid a rate hike in March, we think the FOMC would have to see a sharp slowdown in inflation. Although hiring is likely to drop in January on the weight of Ómicron, the current wave of cases is likely to worsen existing supply challenges for labor and goods. If inflation continues to surprise to the upside, a rate hike in March will be all but assured. The optics of remaining idle with consumer inflation still at 7% will be difficult.”

“We anticipate that the FOMC will raise the fed funds rate by 25 bps per quarter through the third quarter of 2023, bringing the target range to 1.75-2.00%. We also look to the FOMC to announce a balance sheet reduction at their meeting in September this year.”