The US Federal Reserve kept the rate in the range of 0-0.25% and is preparing to raise :: News :: RBC Investments

The Fed has announced that it will end its bond buyback reduction program in March 2022. The rate, as expected, remained the same

US Federal Reserve Chairman Jerome Powell

(Фото: Graeme Jennings-Pool / Getty Images)

The US Federal Reserve announced that it will continue to reduce the purchase of bonds from the market and will complete their purchase in early March. About it says in a statement following the first meeting of the Federal Open Market Committee (FOMC) in 2022, which took place on January 25-26. In addition, the Fed decided to leave the base rate unchanged at 0-0.25%.

“Given inflation well above 2% and a strong labor market, the Committee expects that it will soon be appropriate to raise the target rate band,” the statement said.

In February 2022, the FOMC will buy Treasuries on the open market
bonds
by at least $20 billion, and mortgage papers by $10 billion, that is, by only $30 billion. January the regulator bought $60 billion worth of assets. Until November 2021, the Fed, providing the market with liquidity, bought back bonds from the market for $120 billion monthly.

For the first time the Fed launched the QE asset buyback program (quantitative easing – “quantitative easing”) at the beginning of the pandemic – in March 2020. The regulator began buying $120 billion worth of treasury and mortgage bonds from the market every month. Together with the rate cut to 0-0.25%, this contributed to the influx of liquidity into the market, which helped asset growth during the pandemic. In November 2021, the Fed for the first time since the beginning of the program announced to reduce asset buybacks by $15 billion every month.

The reaction of US stock indices to the decision of the Fed at 22:18 Moscow time:

  • the Dow Jones index is growing by 0.57%, up to 34,491.81 points;
  • the S&P 500 is up 1.17% to 4407.63 points;
  • the NASDAQ Composite index rises by 2.19% to 13,836.4 points.

All 83 analysts polled by Refinitiv expected that the Fed would not change rates at the January meeting. Analysts at Freedom Finance also did not rule out that the Fed would announce its intention to start raising rates as early as March.

The market also expected a reduction in the asset buyback program. In early January, The Wall Street Journal wrotethat the Fed plans on January 25-26 to discuss options to reduce the portfolio of treasury and mortgage bonds.


What will the Fed do in 2022 and what will be the consequences: 2 scenarios

Фото:Shutterstock

In mid-December, the US Federal Reserve also left the base rate unchanged. However, the regulator decided speed up curtailment of the program to stimulate the economy. The Fed has announced that it will cut its purchases of bonds on the market by $30 billion a month — US Treasury bonds by $20 billion and mortgage bonds by $10 billion.

Annual inflation in the US in December 2021 turned out the highest in almost 40 years – it accelerated to 7%. The last time it was at this level was in 1982. At a Senate hearing on January 11, Fed Chairman Jerome Powell saidthat the fight against inflation will be an absolute priority for the American financial authorities. The Fed’s goal is to bring US inflation down to 2% and bring the unemployment rate down to 2%.

According to forecasts by Goldman Sachs, JPMorgan and Deutsche Bank, this year the Fed raise interest rate at least four times since March. Although former members of the Fed predicted three increases each in 2022 and 2023.

“Fed Chairman Powell has made it clear that high inflation threatens to achieve full employment. Consequently, the 2022 monetary policy course is currently aimed at a rapid normalization. This year, a four-stage increase in interest rates is possible,” agreed Peter Brezinczek, chief analyst at Raiffeisen Bank International.

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A debt security whose owner has the right to receive from the person who issued the bond its face value within a specified period. In addition, the bond implies the right of the owner to receive a percentage of its face value or other property rights. Bonds are the equivalent of a loan and are similar in principle to the lending process. Both governments and private companies can issue bonds.

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