Investors Brace for Fed Policy Meeting as Market Churn Continues

The Federal Reserve building in Washington, on Oct. 22, 2021. (Daniel Slim/AFP via Getty Images)

With markets roiled by a wave of risk-off sentiment linked to geopolitical tensions in Ukraine, an Omicron surge, and worries around how aggressively the Federal Reserve will move to relieve inflationary pressures, investors are looking to the central bank’s two-day policy meeting for clues around how fast the Fed will tighten its loose monetary settings.

When the Fed wraps up its Jan. 25–26 meeting of the Federal Open Market Committee (FOMC) on Wednesday, investors generally expect an announcement of a March liftoff in interest rates, which the central bank dropped to near zero at the start of the pandemic.

While there’s a mere 5.6 percent chance that the FOMC will vote to raise rates at the January meeting, there’s an 84.8 percent chance for a 25-basis-point hike in March, according to CME’s Fed Watch tracker. A small minority (5 percent) is betting on an even bigger 50-basis-point jump at the March meeting. A 50-basis-point hike in March would be an extraordinary move as the Fed hasn’t raised rates that fast since 2000.

“The initial interest rate hike from the Federal Reserve could come in March. But could it be a larger, half-point hike? If there is any likelihood of that happening, this is the meeting where the Fed needs to begin prepping markets for that possibility,” Bankrate Chief Financial Analyst Greg McBride told The Epoch Times in an emailed statement.

The Fed Watch tracker, which is based on futures contracts that reflect short-term rate expectations, shows that markets have priced in a total of four rate increases in 2022, though Goldman Sachs economists see a growing likelihood that the Fed will move more aggressively with a fifth hike this year.

In response to soaring inflation, which in the year through December rose at a 7 percent pace, the fastest since 1982, the Fed in November started to wind down its monthly bond-buying program, another pandemic-era emergency measure deployed to boost the economy. Some economists and market analysts have called for a faster reduction of the asset purchases, which are on pace to be phased out entirely by mid-March.

“The Fed doubled the pace of tapering at their last meeting in December. Rather than waiting until March, why not sunset those bond purchases altogether at this meeting? That would better align the Fed with the hawkish inflation stance and better position them to actually let bonds begin rolling off their balance sheet as soon as March,” McBride said.

Investors are sure to scour Fed Chair Jerome Powell’s remarks at the conclusion of the FOMC meeting for clues around when the central bank will begin reducing its nearly $9 trillion balance sheet, a process known as quantitative tightening.

Recently released minutes from the Fed’s December policy meeting (pdf) show FOMC members open to rolling off the central bank’s balance sheet faster, with the minutes indicating that “participants judged that the appropriate timing of balance sheet runoff would likely be closer to that of policy rate liftoff than in the Committee’s previous experience.”

Risk assets have taken a beating lately, driven partly by concerns that the Fed’s easy money policies, which have provided a tailwind to markets, are coming to an end. Geopolitical tensions between the West and Moscow over a possible Russian invasion of Ukraine have added to the uncertainty and dented sentiment.

The benchmark S&P 500 came close to confirming a 10 percent correction on Monday, while the tech-heavy Nasdaq is down around 14 percent year-to-date.

Wall Street’s main indexes slipped at open on Tuesday, suggesting the risk asset selloff was poised to deepen. The Dow Jones fell 177.86 points, or 0.52 percent, at the open to 34,186.64. The S&P 500 opened lower by 43.49 points, or 0.99 percent, at 4,366.64, while the Nasdaq dropped 244.26 points, or 1.76 percent, to 13,610.87 at the opening bell.