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Federal Reserve officials appear ready to act faster than previously announced to keep the US economy from overheating amid high inflation and near full employment.
Regulators are worried about the possibility of another year of growth above the economy's capabilities amid already high inflation and amid coronavirus outbreaks. Along with a larger balance sheet to contain long-term borrowing costs, the conditions "could require a potentially faster rate of rate normalization," the minutes of the Federal Open Market Committee meeting of December 14-15, published Wednesday, said.
Financial markets have already assessed the Fed's statements as unequivocally hawkish. On average, about 80% of traders expect to raise rates in March.
According to the minutes, officials also believe that the time to reduce the balance by $8.8 trillion is "closer to the time of the interest rate increase" than economists had previously expected. However, analysts at JPMorgan Chase & Co. expect that this process will begin no earlier than the third quarter of 2022.
Over the past two decades, the Fed's tightening cycles have been gradual and predictable, starting with a gradual "weighted" increase in the pace of the 2000s. After the 2008 financial crisis, the Fed began to swing slowly, as the downturn of the global economy and too low inflation - combined with a painful recovery without work - required caution.
By 2018, however, the central bank was showing stable fourfold rises per year.
"We are used to it... a very predictable interest rate cycle," said Vincent Reinhart, former head of the Fed's monetary department. - "Now we have the opportunity to catch up, so they (members of the Fed committee - ed.) want to be considered nimble."
He believes that in practice this means that one rate hike may soon be followed by another at the next meeting, without interruptions and compliance with previous plans for a three-step increase.
Recall that at the December meeting, Fed representatives proposed a method of three quarter-point increases in 2022, according to the median of the central bank's "dot graph".
The Fed's haste and desire for a more aggressive fight against inflation suggest that its actions will now be clearer and more decisive than during the 2008 crisis. The very nature of these actions confirms the desire to destroy the market's perception that the Fed has lost the reins of economic governance.
The increase in the Fed's inflation rate of 5.7% in November exceeded the officials' target of 2% for the ninth consecutive month, refuting their earlier forecasts regarding the temporality of the price spike.
"They are fighting a different battle on this exit," said Priya Misra, head of global interest rate strategy at TD Securities in New York, referring to the last time (2008) The Fed refused a sharp increase in rates. "They also explain to us why this is happening: inflation, as well as the fact that we are approaching full employment," says Priya.
According to Anna Wong, one of Bloomberg's analysts, "the minutes showed that the FOMC is uniting around the view that the economy is ready for a widespread elimination of monetary policy, and the omicron option is unlikely to slow it down." The expert bet that the rates will be raised in March.
Fed Chairman Jerome Powell and other officials intend to further discuss the prospects next week - before a meeting on January 25-26, at which they can finally schedule March events. At the same time, politicians have not yet made detailed comments on how they assess the impact of the increase in the number of Covid-19 infections associated with the Omicron variant, probably waiting for the latest data from the Ministry of Health.
According to the minutes, Fed officials discussed the notes of the institution's employees on issues related to the normalization of the central bank's balance sheet after the purchase of trillions of dollars of bonds. During the last rate hike cycle in the 2010s, the Fed waited almost two years after the start to start reducing assets.
But this year, probably, everything will be different.
This time, "the participants came to the conclusion that the appropriate timing of withdrawal from the balance sheet is likely to be closer to the time of interest rate withdrawal than in the committee's previous experience," the minutes say.
In addition, "some participants felt that a significant reduction in the balance sheet may be appropriate in the normalization process."
Markets, meanwhile, also expect the unemployment rate to hit lows in December at around 4.1% in Friday's government report, a figure close to what the Fed said corresponds to peak employment. Preliminary data on primary unemployment benefits, which showed lows in December, confirms this possibility.
The minutes did provide some clarity on how officials view maximum employment, a variable that was central to timing the rate hike. In addition to the general unemployment rate, the committee discussed whether the labor supply, expressed in the participation rate, could recover if companies compete for workers, as is the case now.
In addition to competing for employees, the best-year employee participation rate was 81.8% in November, below the peak of the most recent expansion of 83% in January 2020.
The minutes said that "a number" of officials felt it would take longer than expected to fully re-establish participation - in fact, this indicates that the economy is already close enough to what they consider full employment.
In addition, "many participants saw the US economy move rapidly towards the committee's goal of maximum employment," the minutes said.
The markets reacted amicably to the news with a decrease in quotes. This is because investors are afraid to invest in futures on high-risk instruments, since in the near future the financial capabilities of many companies will be significantly reduced – the era of "cheap loans" is coming to an end. Changes in bond yields also have an impact.
So, the S&P 500 stock index fell by 1.9% yesterday to close, which is the biggest drop in more than a month. Today, it continued the fall line, rolling back another 0.46%, but the markets rely on the expected news on unemployment. Also, a good increase in exports can support investors. Therefore, there is every chance that the fall will be recouped during this trading session.
The Nasdaq 100 also showed a strong correction starting on January 3, however, both indexes then stabilized and began to grow.
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