The Federal Reserve revealed few specifics about it rates strategy beyond the hawkish mood hinted at earlier this year, but it did reiterate that it would prioritize raising rates over reducing its balance sheet, according to minutes from its Federal Open Markets Committee in January.
The FOMC will prioritize maximum employment and price stability as its goes about reducing the size of its $8.3 trillion balance sheet, according to notes released on Wednesday. An even bigger priority will be to begin raising the target for the federal funds rate even as it sheds securities, according to the notes.
Nevertheless, say some industry observers, the Fed is getting a late start as it is. Its poky pace of monetary action is setting up the markets for a rush of increases beginning in March, they say.
“The data clearly justify a 50 [basis point] hike in March,” BofA Securities said in a recent note, citing BofA Economics. “Indeed, we believe the Fed should have started hiking last fall. The risk of one or two 50 bps hikes out of the gate is rising.”
As inflation worsens – the CPI stood at 7.5% -- in January, the need for an even more aggressive Fed hawkish pivot is escalating, even if the expected number of rate hikes for 2022 is up to 6.4 BofA Securities said. BofA’s official view is for seven rate hikes this year, the company said.
Some investors say the Fed is watching, and expects the central bank to adjust its outlook accordingly as more data rolls in.
“For a market that has shifted more hawkish, these minutes will come off dovish,” according to an email statement from Jason England, global bonds portfolio manager at Janus Henderson Investors. “We have seen a strong January jobs report and a headline CPI print of 7.5% since the January meeting, so a data dependent Fed will continue to incorporate these into their outlook, as well as another jobs report, PCE print and CPI print prior to the March meeting.”
