Jerome Powell is set to unleash an aggressive policy of the Central bank in a decade to fight inflation. The Fed Chair’s words will be dissected by investors looking for bigger moves ahead.
What’s more?
The FOMC –Federal Open Market Committee, will likely raise a half-point interest rate hike in its two-day meeting ending on Wednesday. This will be the largest hike since 2000. The central bank is also planning to trim its $8.9 trillion bloated balance sheet.
According to Ellen Gaske, a PGIM Fixed income economist, the officials want to tighten front loading as they are catching up with inflation. The real question is how high the rate hikes need to moderate the kind of inflation one is seeing now.
An increase of 50 basis points will be the first since Chairman Allen Greenspan’s tenure. Markets have factored in the move, and some investors are betting on a 75-basis point hike in June.
FOMC will have three options during the closed-door meeting, including a 75 basis point increase. According to Roberto Peril, the global head of policy research at Piper Sandler & Co., the odds of surprise are low because the policy move on Wednesday has already been telegraphed before, and investors’ focus will be on Powell’s conference, where more emphasis will be on Fed Chair’s tone. Powell is expected to remain hawkish.
According to Bloomberg Economists Eliza winger, Andrew Husky, and Yelena Shulyatyeva, FOMC will hike half a point in May with a plan to reduce the Fed balance sheet. Powell will avoid giving specific future hike rates as the policymakers will first see how the asset runoff affects the economy in the few months.
The statement is expected to have vague guidance on rate increase without giving details on the pace and size of the rates. The FOMC is expected to acknowledge the disappointing gross domestic product reported last week; the statement may also indicate that job gains have been substantial and consumer spending remains solid.
The FOMC is likely to announce its plans to shrink its balance sheet with maturing securities. The committee has discussed reducing $95 billion in assets per month, comprising $35 Billion in mortgaged back securities and $60 billion in Treasuries. This will work out to around $1 trillion, which is as per markets expectations and nearly double the $50 billion a month that Fed reduced from its balance sheet between 2017 and 2019.
The reductions are expected to start in June, as confirmed by the new Vice-Chair of the Federal Reserve, Governor Lael Brainard.
In the press conference, Powell is expected to be pressed on the future rate and size increase, including whether they would consider a 75-basis point hike like the last time in 1994 by Greenspan.
The chair is also expected to question the growing recession risks, with economists from Deutsche Bank predicting a severe decline and Goldman Sachs estimating a 35 % decline.
