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Markets Anxious As Fed Opens 2-Day Meeting

David Krechevsky
Jan 25, 2022
Federal Reserve Bank

Investors, mortgage brokers & bankers await latest policy statement on fighting inflation

KEY TAKEAWAYS
  • Federal Open Market Committee convenes 2-day meeting today.
  • Expected to update its plans to end securities purchases, raise benchmark interest rate.
  • First rate hike expected to be imposed in March; total of four expected for 2022.

Investors, mortgage brokers and bankers are anxious this week as the Federal Reserve's Federal Open Market Committee (FOMC) begins its monthly two-day meeting today.

The Dow Jones Industrial Average fell more than 1,000 points Monday before rebounding to close up 99 points. Today, all three major stock market indexes fell more than 2% at the open, according to Yahoo Finance. Meanwhile, yields for U.S. government debt were climbing "across the board" today, according to MarketWatch.

All three major stock indexes have had a rough start to 2022. According to Barron's, as of Monday the Nasdaq Composite Index had shed 12% this month, while the S&P 500 was down 7.7% and the Dow had fallen 5.7%. 

The volatility in the stock and bond markets comes amid the expectation that the Fed will provide more insight into its plans to end its pandemic-imposed bond and securities purchases in March, while also raising its benchmark interest rate, currently at 0.25%, by a quarter point. The Fed has also said it plans to reduce its portfolio, commonly referred to as its balance sheet, which totaled $8.5 trillion at the end of 2021.

Jason Ware, Albion Financial Group Partner, told Yahoo Finance last week that "it's very clear that the first rate hike will be at the March meeting. So I think as we look at the January meeting — which is likely to produce very little or zero, quite frankly, in policy terms — ... what we're going to be looking at is really just the language around inflation."

He added that, "At the end of the day, inflation is what's driving Fed policy, at least over the medium term."

On Jan. 12, the U.S. Department of Labor’s Bureau of Labor Statistics released its monthly Consumer Price Index report for December 2021, showing the CPI increased 7% from a year earlier and 0.5% from November. The year-over-year growth was the fastest in the CPI since June 1982.

How the FOMC will react to the recent market volatility is one question to be answered when it issues its policy statement following the end of the meeting on Wednesday. Chairman Jerome H. Powell will hold a news conference Wednesday afternoon.

As Mark Cabana, head of U.S. short rate strategy at Bank of America, told CNBC, the expectation is that the policy statement will set a strong tone for fighting inflation.

“We don’t expect them to sound dovish,” he told CNBC. “The [bond] market seems to be reacting to the drop in equities plus the geopolitical tensions, so maybe the Fed sounds not as hawkish as they otherwise would have. But we don’t think the Fed is going to come out and tell the market it’s wrong for pricing in four rate hikes this year.”

While the Fed is not expected to announce a rate hike this week, when it does finally push the rate up it will be the first increase since 2018.

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