Fed and BOC day: Fed sets up March liftoff, balance sheet later, BOC holds
US stocks gave up earlier gains as Treasury yields jumped after Fed Chairman Powell signaled they will use their tools to ensure inflation doesn’t take hold, paving the way for take-off in March. Previously, the stock market may have become too pessimistic and overpriced a slowdown that would come from an aggressive Fed tightening cycle. After hearing Fed Chairman Powell’s speech, it became clear that the risk of further rate hikes was high and the previous rally on Wall Street had crumbled.
As the January FOMC policy decision approached, financial markets were widely expecting the Fed to set up a takeoff in March. Fed Chairman Powell’s confirmation hearing earlier this month sent a clear signal that high inflation needs to be tackled and that the economy no longer needs aggressive stimulus.
The Fed kept its key interest rate close to zero, also noting that QE will end as planned in March, which paves the way for a rate hike in March.
What surprised the markets
Wall Street was split on what the Fed would say about the balance sheet. The FOMC statement said: “expects the reduction in the size of the Fed’s balance sheet to begin after the process of increasing the target range for the federal funds rate begins.” The Fed is showing that it will be flexible on the balance sheet, but it will eventually have to choose between fighting inflation or avoiding a deterioration in financial conditions.
The plan ahead
The Fed will try to convince the markets that it has a sufficiently hawkish plan that will fight inflation but not cripple markets and create a de-risking environment. The Fed can raise rates at all other meetings, with the balance sheet liquidation beginning in May or June. Powell made sure not to make any firm commitments on price or rate increases or how they would reduce their holdings. The main conclusion is that both mandates call for moving away from hosting. The more Powell talked during the Q&A session, the more bellicose he sounded.
Stocks pared gains after Powell did not rule out raising rates at every meeting and that they could move sooner, and possibly faster on the balance sheet than they did last time.
The Bank of Canada has taken a hawkish stance as policymakers will wait for the omicron wave to pass before raising rates. This was a live meeting and the Canadian dollar fell after the announcement but turned positive as the bank signaled a high probability of moving in March and balance sheet normalization will come shortly. time after. Money markets expect the Bank of Canada to raise rates to 1.75% over the next 12 months, which should make the loonie a preferred currency for much of the year. Added to the interest of holding the loonie is the general consensus that the price of oil, Canada’s main export, should remain high for a good part of the year.
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