The Fed entered into the new year needing to reset its credibility to control inflation at nearly a 40-year high. It has been nimble since its hawkish turn last fall as it doubled the pace of QE taper, brought forward the date of rates lift-off, and increased the number of anticipated rate hikes without two months.

Counterbalancing this newfound agility is the Fed’s longstanding policy to provide forward guidance well ahead of any policy change. The challenge for Powell, at the January Fed meeting on Wednesday, is to telegraph a March rate hike in a manner that leaves room for the Fed to move more or less hawkish, perhaps even leaving space for a 50-basis point hike, as some traders have priced in the past week.

The Fed’s preferred price and wage gauges (ECI and PCE deflator) will be released a few days after the FOMC meeting, and we expect both to show elevated inflation pressure.

FOMC rate decision

We are foreseeing rates to remain steady with the current pace of taper to be maintained at the January meeting. The main goal of the meeting is for the FOMC to telegraph a March rate hike and balance-sheet runoff this year, emphasizing the uncertainty and downside risks to growth amid the Omicron wave.

There, most likely, will be a substantial discussion of balance-sheet runoff. At the post-meeting press conference, Fed Chair Powell will provide more guidance, as hinted in the December FOMC meeting minutes.

This new guidance will suggest an appropriate interest-rate hike at the next meeting in March. The FOMC will also anticipate a balance-sheet runoff to start once rates normalization is underway but will not provide clear calendar-based guidance on the timing of runoff.

We expect that a signal of when and how balance-sheet normalization would happen will come only at the March meeting when the committee will issue a detailed addendum to policy normalization principles and plans.

Both the statement and Chairman Powell’s remarks at the press conference will characterize labor market conditions as tight, having been improving rapidly before Omicron but might weaken temporarily in the coming months.

Powell likely will touch on the possibility of a 50-basis point hike at the March meeting. He should mention that it is not something most on the committee currently are anticipating. What would be most interesting for us is if he couches that answer in conditionals and does not completely dismiss the possibility.

 

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor.

Feed news Join Telegram

Recommended Content


Recommended Content

Editors’ Picks

EUR/USD clings to strong daily gains, stays below 1.0700

EUR/USD clings to strong daily gains, stays below 1.0700

EUR/USD has gone into a consolidation phase after having climbed to its highest level in nearly a month at 1.0687 in the European session. ECB President Lagarde's hawkish comments and the broad-based selling pressure surrounding the dollar fueled the pair's rally at the beginning of the week.

EUR/USD News

GBP/USD retreats modestly after testing 1.2600

GBP/USD retreats modestly after testing 1.2600

GBP/USD has edged slightly lower after having tested 1.2600 in the European session. With the dollar facing heavy selling pressure in the risk-positive market environment, however, the pair clings to strong daily gains ahead of BOE Governor Bailey's speech.

GBP/USD News

Gold climbs to two-week high at $1,865 amid weaker USD

Gold climbs to two-week high at $1,865 amid weaker USD

Gold capitalizes on the improving market mood and the weakening dollar on Monday, trading at its highest level in two weeks above $1,860. The benchmark 10-year US Treasury bond yield is up more than 1%, limiting XAU/USD's upside for the time being.

Gold News

Cardano whales enter buying spree before the Vasil hard fork

Cardano whales enter buying spree before the Vasil hard fork

Cardano price is showing an interesting set up as it struggles to make a move above a crucial support level. A rejection could lead to a buying opportunity for patient investors before ADA explodes.

Read more

Week Ahead on Wall Street: Options expiry to the rescue on Friday but its official, we are in a bear market

Week Ahead on Wall Street: Options expiry to the rescue on Friday but its official, we are in a bear market

Another wild and volatile week which seems to be the tone so far for 2022. Wild swings throughout the week were mirrored on Friday with wild intraday swings. The S&P 500 did manage to slide into a bear market territory on Friday.

Read more

Majors

Cryptocurrencies

Signatures