Fed: January's statement likely to signal rates could be lifted at its next meeting – Wells Fargo

The Federal Reserve, at the January meeting, will likely tee up the fed funds rate to increase as soon as its next meeting, explain analysts at Wells Fargo. They add that any hints that liftoff is likely to come as early as the March meeting will come down to the statement and Chair Jerome Powell's post-meeting press conference.

Key Quotes: 

“The FOMC's first meeting of the year is likely be a quieter affair than its December meeting, when the Committee accelerated its taper plans and outlined a more aggressive policy path for 2022. There will not be a fresh Summary of Economic Projections, and we expect the FOMC to reaffirm its current pace of tapering, leaving asset purchases on track to end in mid-March.”

“With the FOMC growing increasingly concerned about inflation, we look for January's post-meeting statement to signal the fed funds rate could be lifted at its next meeting on March 15-16. Such a hint could come by indicating that the labor market is close to maximum employment, the remaining criteria the Committee has laid out for liftoff. We expect the statement and Chair Powell in his press conference to 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 stave off a March rate hike, we believe the FOMC would need to see an abrupt slowdown in inflation. Although hiring is likely to stumble in January under the weight of Omicron, the current wave of cases is likely to worsen the existing supply challenges for labor and goods. If inflation continues to surprise to the upside, a March increase will be all but assured. The optics of standing idle with consumer inflation still at 7% will be difficult.”

“We anticipate the FOMC will raise the fed funds rate 25 bps per quarter through Q3-2023, bringing the target range to 1.75-2.00%. We also look for the FOMC to announce a reduction in its balance sheet at its September meeting this year, with runoff beginning the following month.”