It may take another few weeks, possibly up to the March meeting, to understand fully the path of the Federal Reserve, Sébastien Galy writes in an essay on finews.first.
This article is published on finews.first, a forum for authors specialized in economic and financial topics.
The Federal Reserve (Fed) meeting led the market to believe in a potentially faster pace of rate hike than one per quarter with the odds of a 50bp rate hike in March rising to 50 percent in swaps. A key message from the chairman was that «we’re probably going to end up doing quite a bit more than people had anticipated».
Quantitative Tightening, that is the reduction in the Fed’s balance sheet, will start sometime after March which is very much live but not confirmed. The pace of reduction will be faster than in the first episode in 2017, confirming what many participants said at the previous Federal Open Market Committee (FOMC).
«European and Asian equity markets did not welcome this hawkish surprise»
This surprise on rates and the balance sheet suggests the pain in the equity market is not high enough for the Fed to react to it. They are more focused on average households which are far less invested in the stock market. European and Asian equity markets did not welcome this hawkish surprise.
The question is: when will the Fed stabilize expectations in the interest rates market? The odds are that it will continue to be faced with surging inflation, especially the one lagging in rent (less sensitive to rates), which is a significant issue.
«The real question though is the pace of tapering of the balance sheet»
That suggests it may take another few weeks, possibly up to the March meeting, to understand fully the path of the Fed. The real question though is not this, but the pace of tapering of the balance sheet as it can have a momentous impact on equities and the repo market.
For now the Fed is going to a faster pace of rate hikes than in 2017 – this is problematic as this piece argues.
Sébastien Galy is a Senior Macro Strategist at Nordea Asset Management.
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