Aurelia Butler

(Reuters) – The Federal Reserve said on Wednesday it will rely primarily on letting bond holdings run off the balance sheet as they mature as it grapples with persistent inflation, rather than selling bonds outright, which analysts say reduces the chances of near-term asset sales.”The Committee intends to reduce the Federal Reserve’s securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA),” the Fed said in principles released at the end of the central bank’s two-day policy-setting meeting.Fed officials also said they expect they will begin reducing the central bank’s balance sheet after they start raising interest rates.The comments may reduce some market concerns that asset sales by the U.S. central bank could saturate the market and send bond yields sharply higher, at least in the short term.It “makes asset sales very unlikely in the first year,” Jefferies economists Aneta Markowska and Thomas Simons said in a note on Wednesday.The Fed also said it intends to hold mainly Treasury securities in the longer run, reducing its footprint on other types of credit.That could mean that the Fed lets its holdings of mortgage-backed securities (MBS) run off at a faster pace than Treasuries.The Fed’s nearly $9 trillion portfolio had doubled in size during the pandemic as the central bank snapped up Treasury bonds and MBS to support markets and the economy. Policymakers are now crafting a plan for reducing those holdings, but Fed officials will need to tread carefully as they shrink their holdings.”The Committee is prepared to adjust any of the details of its approach to reducing the size of the balance sheet in light of economic and financial developments,” the Fed said in a statement. More

(Reuters) – The watchword the last time Federal Reserve Chair Jerome Powell oversaw a rate-hiking cycle was “gradual.” This time will be different.”We are going to need to be, as I’ve mentioned, nimble about this. The economy is quite different this time,” Powell said on Wednesday following the Fed’s January policy-setting meeting at which it signaled its first interest rate hikes of the COVID-19 era would likely start in March. And from there on, it’s pretty much anyone’s guess.”Powell put a kibosh on any type of ‘measured/gradual’ guidance, because the economic outlook is much too uncertain,” Jefferies economists Aneta Markowska and Thomas Simons wrote in a note titled: “FOMC Signals A Guidance-Light Tightening Cycle.” For starters, inflation is far higher and the economy and labor markets are much stronger than when the Fed undertook its last set of rate rises in the previous decade, Powell said. Then, from December 2015 to 2018, the Fed never left less than three months between rate hikes, and never raised the target rate more than a quarter-of-a-percentage-point at a time. The policy path, Powell and other Fed policymakers promised repeatedly during that period, would be gradual. And once the Fed began shrinking its balance sheet to further tighten policy, two years after it began raising rates, it promised to do so at the pace that paint dries. Today, inflation is near a 40-year high and the unemployment rate, at 3.9%, is within touching distance of the Fed’s goal of maximum employment. “As we work our way through this, meeting by meeting, we are aware that this a very different expansion…Those differences are likely to be reflected in the policy that we implement,” said Powell, who used the word “nimble” at least three times. Powell didn’t detail exactly what those differences would be, and in fact, asked directly if the Fed could be expected to raise rates in bigger intervals or was otherwise departing from its ‘gradual’ script, said policymakers hadn’t yet broached those questions. “We will begin to address them as we move into the March meeting and meetings after that,” he said. “We fully appreciate that this is a different situation.”In December Fed policymakers had signaled they could raise rates three times this year, but since then the inflation picture has, if anything, deteriorated, Powell said. On the possibility of more than four rate hikes this year, “he didn’t say they wouldn’t,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, “which indicates a flexibility to raise rates much more quickly (if necessary) than anyone was expecting.”Others were more succinct, “Today the Fed interest rate rocket left the hangar,” said Beth Ann Bovino, U.S. chief economist at S&P Global (NYSE:SPGI) Ratings.”No more Mr Nice Guy,” wrote Michael Feroli, chief U.S. economist at JPMorgan (NYSE:JPM).Interest rate futures markets have bought fully into a faster trajectory, with the pricing there now reflecting better than even odds of five hikes of a quarter point each this year.Powell repeatedly emphasized that the Fed’s primary job now was to bring down inflation closer to its 2% goal. Improving, if far from fully fixed, supply chains would help, as would the lack of any new fiscal stimulus in the works. But rather than assuage concerns that the Fed might become quite aggressive as it seeks to tamp down inflation, Powell pointed to the different reality this time.”What we need here is another long expansion…that’s going to require price stability. That’s going to require the Fed to tighten interest rate policy and do our part in getting inflation back down to our 2% goal,” Powell said. More

Stressing uncertainty on the economic outlook, including the risk that price pressures could fail to abate as forecast, the Fed chair told reporters on Wednesday that policy must be “nimble” to confront risks to its mandate for price stability and maximum employment. Investors took the comments to mean the Fed would be more aggressive in tightening than previously expected.As Powell spoke during a 55-minute virtual press conference, stocks erased gains, bond yields surged and the dollar advanced. The S&P 500 index posted a back-to-back drop after rallying more than 2% earlier in the day, while the two-year Treasury yield had the largest one-day increase since March 2020.“There’s a risk that the high inflation we’re seeing will be prolonged, there’s a risk that it will move even higher. We have to be in a position with our monetary policy to address all of those plausible outcomes,” Powell said, adding that officials were “of a mind” to raise rates in March. He spoke after the Federal Open Market Committee confirmed it would end its asset purchase program in early March and begin shrinking its bond holdings after rate increases commence.The hawkish pivot, against a backdrop of turmoil in stocks, comes amid consumer inflation readings that have repeatedly surprised and hit 7% — the most since the 1980s — and a tight labor market that’s pushed unemployment down faster than anticipated to almost its pre-pandemic level.“The implication was they would probably have to go a bit further and a bit faster than people were anticipating,” former New York Fed President Bill Dudley told Bloomberg Television. “I don’t think he committed to doing every meeting. I think what he committed to is ‘we’re probably going to end up doing quite a bit more than people had anticipated’.” Dudley is a senior adviser to Bloomberg Economics.What Bloomberg Economists Say“The hawkish tone of the statement and Chair Jerome Powell’s press conference suggests there’s upside risk to the four rate hikes priced in by financial markets ahead of the meeting. Bloomberg Economics forecast earlier this month the year will probably end with a total of five hikes, with an upside risk for six.”– Anna Wong, Yelena Shulyatyeva, Andrew Husby and Eliza WingerA rate hike would be the central bank’s first since 2018, with many analysts forecasting a quarter-point increase in March to be followed by three more this year and additional moves beyond. Critics say the Fed has been too slow to act and is now behind the curve in tackling inflation, though key market gauges don’t back that view. Even some Fed officials have publicly discussed if they should raise rates more this year than forecast. In December their median estimate was for three hikes in 2022. Powell made a point of saying that the economic projections would be updated in March.“The Fed is clearly looking through omicron and will not react to weak data for January and February,” Bank of America Corp (NYSE:BAC). economists led by Ethan Harris said in a note. “Bottom line, the risks are skewed to more than four hikes this year.”Futures indicated around 30 basis points of tightening at the March meeting, showing a quarter-point increase is fully priced and implying a one-in-five chance of a 50 basis point hike.Officials held the target range for their benchmark policy rate unchanged at zero to 0.25% as expected. They also said they will conclude asset purchases on schedule, leaving them on track to end in “early March.”The Fed’s balance sheet stands at nearly $8.9 trillion, more than double its size before officials began massive asset purchases at the onset of the pandemic to calm market panic.In a separate statement outlining the principles it would apply to reducing its balance sheet, the Fed said that over the longer run, it intends to primarily hold Treasury securities. The Fed currently also holds mortgage-backed securities and the shift is aimed at minimizing its effect “on the allocation of credit across sectors of the economy,” it said. Powell said the Fed will make decisions on the timing and pace of balance-sheet reduction at coming meetings.Despite criticism that it has dragged its feet, the Fed is moving much quicker than it once expected to — prompted by the failure of inflation to fade as anticipated amid robust demand, snarled supply chains and tightening labor markets. As recently as September, central bank officials were split on whether any rate hikes would be warranted in 2022.The meeting is the last of Powell’s current term as Fed chair, which ends in early February. He’s been nominated to another four years at the helm by President Joe Biden and is expected to be confirmed by the Senate with bipartisan support. ©2022 Bloomberg L.P. More

The combined moves will complete a pivot away from the loose monetary policy that has defined the pandemic era and toward a more urgent fight against inflation. In a press conference Fed Chair Jerome Powell said officials will discuss plans for reducing the central bank’s nearly $9 trillion balance sheet at their next two meetings, adding he expects there to be a “substantial” amount of shrinkage in the Fed’s bond holdings, which would reverse pandemic-era “quantitative easing that stabilized financial markets and the U.S. economy. . Wall Street reversed sharp gains during Powell’s comments. STORY:STATEMENT TEXT: MARKET REACTION: STOCKS: The S&P 500 seesawed from a sharp gain to a loss of 1.03%. BONDS: The 10-year U.S. Treasury note yield rose to 1.8386%, and the 2-year yield rose to 1.01266%; The 2s/10s yield curve flattened to 71.03 basis points after widening initially. FOREX: The dollar index added to a gain, standing 0.54% firmerCOMMENTS:    PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK:”Powell during the question session here is creating a bit of uncertainty, and I think that’s why the market is reacting this way. He’s talking about inflation might worsen, bottlenecks might get worse. What he’s trying to do is prepare the market for a worsening situation and also trying to balance the fear factor. But it seems the responses are creating an atmosphere of uncertainty, which is a negative for the market.    “He’s talking about the Fed might have to use more tools, he’s talking about the balance sheet reduction now. The bottom line is his response is causing the market to fear the uncertainty factor.”PETER CRAMER, SENIOR MANAGING DIRECTOR, SLC MANAGEMENT, REDMOND, WASHINGTON“The Fed is a very slow-moving ship, by design monetary policy has lagged anywhere from nine to 18 months. The about-face we’ve had in terms of the market’s rate expectations the last three months has been warp speed in the context of Fed decision-making. Expectations coming into this meeting were way too hawkish. The pace of which the Fed operates is measured in years and maybe quarters, but not months.“We’re going to see a much more measured pace of rate hikes. My interpretation of Powell is of a man who is not concerned about inflation running rampant, (but) one that acknowledges they had the transitory call wrong. Not in terms of its nature, but more in terms of duration.”CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, INDEPENDENT ADVISOR ALLIANCE, CHARLOTTE, NC“When reporters asked Powell if the Fed would consider raising rates at every meeting,  which would mean more than 4 times this year, he didn’t say they wouldn’t, which indicates a flexibility to raise rates much more quickly (if necessary) than anyone was expecting.”“Reporters also asked Powell about “financial conditions” he said that he didn’t want to comment on that, which indicates the Fed isn’t worried that the stock market is down close to 10% in less than a month – and presumably wouldn’t change their approach if the market were to fall significantly further.”  “This is validation of the concept that the strike price on the Fed put is now much lower, implying that  the Fed would allow the stock market to fall much farther before changing their current behavior.”LEE FERRIDGE, MACRO STRATEGY HEAD NORTH AMERICA, STATE STREET GLOBAL MARKETS, BOSTON“The market got way ahead of itself. The Fed is not going to hike 50 basis points in March. The statement gently pushed against that. This statement brought us back to what they’ve been saying. The fact they haven’t confirmed the more hawkish view that the market was pricing in is why equities sighed a bit of relief.“The second thing to take away from this is that quantitative tightening will happen. The idea of the balance sheet reduction as now mentioned in the statement puts us on the table for June.”BRIAN JACOBSEN, SENIOR INVESTMENT STRATEGIST, ALLSPRING GLOBAL INVESTMENTS, MENOMONEE FALLS, WISCONSIN“If the Fed thinks the current bout of inflation is due to supply-demand imbalances, I’m not sure how they think what they do will help fix that. The Fed is just buying time until supply chains slowly heal. Inflation will then be drifting lower and the Fed can then take the credit.”MICHAEL PEARCE, SENIOR US ECONOMIST, CAPITAL ECONOMICS, NEW YORK”The Fed’s announcement that it will “soon be appropriate” to raise interest rates is a clear sign that a March rate hike is coming. The Fed’s plans to begin running down its balance sheet once rates begin to rise suggests an announcement on that could also come as soon as the next meeting, which would be slightly more hawkish than we expected.”BETH ANN BOVINO, U.S. CHIEF ECONOMIST, S&P GLOBAL RATINGS“Today the Fed interest rate rocket left the hangar and is headed to the launchpad with what we believe is a March liftoff scheduled – the first of at least three hikes this year. Only question may be how high it flies, how fast and how many are launched? We see 3 one-quarter hikes, but another could hit this year with 3 next and 2 in 2024.“ELLEN HAZEN, PORTFOLIO MANAGER, F.L.PUTNAM INVESTMENT MANAGEMENT, WELLESLEY, MASSACHUSETTS “There are no surprises here, they are keeping rates where they are but clearly setting the stage to increase rates in March, that is what has been widely expected. As we look at the implied forecast the market is expecting four hikes this year, I don’t think that is going to change. The key question is when are they going to start talking about actually reducing the size of the balance sheet. It looks as through the taper is going to finish a couple of weeks ahead of schedule, that is not really big news either way but what Powell says in the press conference with respect to how quickly they might actually start to reduce the balance sheet will be very critical.”“They really didn’t talk much about inflation, clearly Powell pivoted on inflation back in December when he said it was time to retire the word transitory and they did not address inflation directly in the statement so that will be key to watch in the press conference as well. If they had something specific to say on inflation they would have said it, and the fact they danced around it a little bit in that first paragraph means they are keeping their options open, perhaps because they still are not convinced that it will end up being sustained.” TOM DI GALOMA, MANAGING DIRECTOR, SEAPORT GLOBAL HOLDINGS, NEW YORK“I think it really was everything that the market was looking for. They will stop their purchasing program by mid-March, so I think it’s really everything that I was expecting. It should be interesting to see what the press conference will say, but it seems to me the Fed is recognizing that inflation’s a problem, it’s not transitory, and they’ve got to start the process of a liftoff here in rates…they are saying it will soon be appropriate to raise rates, so I don’t think there’s any mystery here.”BRENT SCHUTTE, CHIEF INVESTMENT STRATEGIST, NORTHWESTERN MUTUAL WEALTH MANAGEMENT COMPANY, MILWAUKEE, WISCONSIN“Anyone looking for a hawkish message or pivot didn’t get it. So that is giving the market some comfort that the plan that the market has adapted to and priced in is still in place.”“I do believe the market was worried at least that there would be some sort of a more hawkish message that was delivered and so far that has not been the case, we will see what the press conference holds. Certainly it is kind of  along the plans of what they had outlined in the past and what the market has priced in already. So the market is taking, I think,  some solace in that and actually pushing just a bit higher.”ALAN LANCZ, PRESIDENT, ALAN B. LANCZ & ASSOCIATES, TOLEDO, OHIO    “It was nothing as draconian as what some investors were worried about when (the Fed) last spoke. The market had taken a tumble, and that’s why there’s probably a sigh of relief. But as you read into it, they’re still keeping it pretty open.”RUSSELL PRICE, CHIEF ECONOMIST AT AMERIPRISE FINANCIAL SERVICES, TROY, MICHIGAN    “The statement still leaves a lot of questions to be answered particularly when it comes to the balance sheet roll off. There wasn’t a whole lot of detail provided.”     “The Fed provided some clarity on the prospect of rate hikes but not all the clarity markets were looking for. There’s still some uncertainty when it comes to the balance sheet roll off. The market’s glad to get a little more clarity given the uncertainty that accompanies transition periods like this.”     “More details will come in the press meeting.” JUAN PEREZ, SENIOR FX TRADER, MONEX USA, WASHINGTON DC    “This decision by the Fed sounds like they are not convinced the time to hike will be in March necessarily as they are leaving open room for consideration of policy stance to adjust as needed.”    “Keeping the balance sheet the same until hikes begin means that they are indeed not taking all easing measures away quite yet. We thought there was chance of this to happen and it could bode poorly for the dollar in the sort-term.”(This story corrects typo in Tom Di Galoma title to Managing Director) More

BENGALURU (Reuters) – Australia’s central bank will end to its bond-buying programme on Tuesday, but is expected to wait till this November before it responds to higher inflation with its first interest rate rise in over a decade, a Reuters poll showed. The country’s underlying inflation, which surged at its fastest annual pace since 2014 in the December quarter, suggests the recent rise in price pressures was not as benign and transitory as policymakers thought it would be.While Governor Philip Lowe was suggesting as recently as last month that a rate tightening this year was unlikely, money markets began pricing in a rise in the Reserve Bank of Australia’s (RBA) record low 0.10% cash rate as soon as May, just two months after a widely-expected U.S. Federal Reserve hike in March.Economists canvassed in a Reuters Jan 18-25 poll also brought forward their rate hike expectations for third month in a row. Most of the 34 respondents, however, expect the RBA to take more time, with a median forecast for a 15 basis-point move in November. Two economists expect a rate rise already in the second quarter, seven in the third quarter, 11 in the fourth quarter and 13 still see the central bank first pulling the trigger next year.Economists were less divided on when the central bank will pull the plug on its bond-buying programme, with 17 out 22 of those who answered the question expecting an announcement at the next policy meeting on Feb. 1. Five others saw the central bank ending the programme launched in response to the coronavirus pandemic in May. “We expect them to end the QE programme, upgrade forecasts, acknowledge the inflation goal has been met and re-emphasise the focus on wages as a demand-side inflation signal,” Chris Read, economist at Morgan Stanley (NYSE:MS), said about next weeks meeting.”While they won’t explicitly guide to near-term rate hikes, they will acknowledge the possibility. Our forecast is for RBA liftoff in November 2022 – this (latest inflation) print raises the risk this could be a few months earlier.”The last time the central bank raised rates was more than a decade ago, in Nov. 2010, when it lifted rates to 4.75%.An expected hike this November would be followed by a 25 basis point increase in the first quarter of next year and another 25 basis points in the June quarter, taking the cash rate back to 0.75% where it was before the pandemic.Marcel Thieliant, senior Japan, Australia & New Zealand economist at consultancy Capital Economics said in a note to clients inflation data made a good case for a rate rise as soon as in May, but a federal election made a hike then unlikely.”The RBA hasn’t changed its policy rate in an election month since it started to announce monthly policy decisions in 2008. And with wage growth set to remain below 3% for now, we expect the Bank to wait until August.”The poll showed inflation would meet the RBA’s target range of 2-3% from next quarter and through 2023 averaging at 2.5% this year and 2.3% in 2023, while the economy is forecast to grow 4.0% this year and 2.9% in 2023. More