Here is what Bloomberg News said this morning:
While today’s Federal Reserve decision is not expected to announce any immediate change, policy makers are likely to signal a rate hike in March. There may also be discussions on the shrinking of the central banks $8.87 trillion balance sheet — so-called quantitative tightening. Despite recent calls for a 50 basis point hike at the March meeting, that is still seen as unlikely by most economists. There are no updated economic forecasts today, but there is a press conference with Fed Chair Jerome Powell at 2:30 p.m. Eastern Time in which he likely to try to retain some flexibility on policy.
The most important phrase in that statement, no Immediate Change.
If that is the case, other than a bit of knee jerk action based on Powell’s Hawkish sounding statements, just more volatility.
Bloomberg went on to say:
The one thing we know for sure is that there’s been a real pivot towards concern about inflation. This is happening both inside the Fed and outside the Fed. Last week President Biden seemed to give his tacit endorsement to an inflation-fighting Fed. This won’t necessarily influence FOMC policy in any way, but it does show that there’s both an economic and political consensus that inflation, not employment, is the side to work on.
Meanwhile, mainstream media outlets are all warning more and more about the costs of inflation, which is interesting. Though again, that’s more a reflection of the new intellectual climate than what that the Fed will do.
If there’s one thing we are interested in specifically it’s what Powell says about balance sheet shrinkage. This will presumably be part of the Fed’s playbook in 2022, but the question is, do members of the FOMC see balance sheet shrinkage as a possible substitute for rate hikes? As I wrote three weeks ago, such a trade (more QT, fewer rate hikes) might actually be dovish, even if it’s not intended to be as such.
I agree with Bloomberg analysis to a degree:
What they call QT, (quantitative tapering) will be initially viewed as dovish, but down the road, if they get serious, like sell $ 100 BILLION OF BONDS EACH MONTH, will topple the asset markets. Market viewers don’t seem to realize that the Balance Sheet is what drove the bubble. We will post our Balance Sheet Influence Study tomorrow.