Fed leaves gradualism behind with urgency on rates, assets

Fed leaves gradualism behind with urgency on rates, assets
The Fed’s pivot toward more aggressively fighting inflation suggested it will show greater urgency than the gradualism of the past.
JAN 06, 2022

Federal Reserve officials are preparing to move quicker than the last time they tightened monetary policy in a bid to keep the U.S. economy from overheating amid high inflation and near-full employment.

Prospects for another year of growth above the economy’s speed limit with inflation already strong — along with a larger balance sheet that’s suppressing longer-term borrowing costs — “could warrant a potentially faster pace of policy rate normalization,” minutes from the Dec. 14-15 Federal Open Market Committee meeting said Wednesday.

Financial markets interpreted the comments as unequivocally hawkish. Traders raised bets on an interest-rate hike as soon as March to around an 80% probability, while the S&P 500 stock index slumped 1.9% at the close, the biggest drop in more than a month.

Officials also saw the timing of reducing the $8.8 trillion balance sheet as likely “closer to that of policy-rate liftoff than in the committee’s previous experience,” according to the minutes. JPMorgan Chase & Co. economists expect that process to begin in September

The details of the Fed’s pivot toward more aggressively fighting inflation suggested it will show greater urgency and agility than the gradualism of the past. They also indicated a desire to smash market perceptions that the central bank is losing its grip on surging prices.

The 5.7% annual increase in the Fed’s preferred inflation gauge in November overshot officials’ 2% target for the ninth consecutive month, toppling their earlier predictions that prices would moderate as supply-chain issues resolved.

Meanwhile, a government report Friday is forecast to show the jobless rate fell in December to a new pandemic low of 4.1% — figure near what Fed officials view as consistent with maximum employment.

“They are fighting a different battle on this exit,” said Priya Misra, global head of rates strategy at TD Securities in New York. “They are telling us why: It is inflation and it is also that we are closer to full employment.”

Chair Jerome Powell and other officials are set to address the outlook over the next week, ahead of their Jan. 25-26 meeting where they could signal the likelihood of a March move. Policy makers have yet to give detailed remarks on how they view the impact from surging Covid-19 infections related to the omicron variant.

Latest News

Texas man says SEC and fund could make him pay twice
Texas man says SEC and fund could make him pay twice

A $141M judgment and a federal asset freeze collide over one shrinking pool

Osaic executives Kristy Britt and Greg Cornick to leave
Osaic executives Kristy Britt and Greg Cornick to leave

The firm's CFO and EVP of Wealth Management Solutions are the latest executives to exit the broker-dealer.

Estate planning becomes a client retention issue for financial advisors, survey finds
Estate planning becomes a client retention issue for financial advisors, survey finds

Clients are saying they would consider switching advisors if another professional offered estate planning services, according to a new Trust & Will survey.

Candidly adds AI agents for Trump Accounts, workplace benefits
Candidly adds AI agents for Trump Accounts, workplace benefits

CEO Laurel Taylor says the fintech's composable AI stack helps workers optimize dollars across Trump Accounts, 529s, 401(k)s, and other employee benefits.

BMO adds three advisors in Dallas amid Y'all Street wealth boom
BMO adds three advisors in Dallas amid Y'all Street wealth boom

The bank has swiped three private banking veterans from BNY as the city climbs the ranks of America's fastest-growing wealth hubs.

SPONSORED Who builds the income when the pension disappears?

Dan Biagini of American Equity says the steady decline of pensions, longer lifespans and a reset in interest rates are rewriting how advisors build retirement income

SPONSORED Why direct indexing stopped being optional

Direct indexing is on pace to outgrow ETFs and mutual funds. Northern Trust's Ken Lassner explains why the advisors who get it wish they had started sooner.