This week we will know the decision on the Fed’s monetary policy
This week, investors will focus on the Federal Reserve’s recent monetary policy decision in 2021, which could contain more signals of tougher action in the face of heightened inflation and economic recovery.
There will be a two-day meeting of the Federal Committee on Open Market Operations on Tuesday and Wednesday, followed by a monetary policy statement and a press conference with Federal Reserve Chairman Jerome Powell. The December statement will also be accompanied by a presentation outlining expectations regarding economic conditions and interest rates over the next few years.
The Fed will reduce the pace of asset purchases
Many economists expect the meeting to be an opportunity to speed up the reduction of the asset purchase program. For more than a year and a half during the pandemic, the Fed purchased US $120 billion in Treasury and Agency Mortgage-Backed Securities (MBS) per month, a program that was a key tool to support the affected economy. Last month, the Fed began cutting the program, slowing purchases by $15 billion a month in November and December.
Before the meeting, Fed officials spoke in a more hawkish tone and suggested that a tightening of policy may take place in the near future. Powell last month announced in Congress that the central bank would discuss the possibility of ending purchases a few months earlier, given the strong performance of the economy and mounting inflationary pressure. Other officials made similar statements.
Increasing inflation pressure in the US
The November Consumer Price Index showed a 6.8% YoY increase in inflation – the highest increase since 1982. Other data emphasize wage pressure in the labour market, which also affects inflation. Last week, the number of unemployment benefit applications was the lowest since 1969, and the number of job vacancies in the US in October exceeded 11 million.
– Strong economic growth, the recovery in the labor market and heightened inflation have clearly shifted the Fed towards accelerated policy shift, – Rick Rieder, investment director at BlackRock wrote on Friday. – The Fed will also have to balance these factors alongside the potential risks of the Omicron option, its impacts on supply and demand, the potentially moderately slowing demand for goods and services, and the potential for increasing geopolitical risk.