The Fed is expected to take a huge step towards raising rates

The Federal Reserve is, of course, expected to announce dramatic changes on Wednesday, which will pave the way for the first rate hike next year. The market expects the Fed to accelerate its bond purchase program and change its end date from June to March.

This could allow central banks to start raising  rates from scratch, and federal officials  release  new forecasts demanding two to three  rate hikes in 2022 and another three to four times in 2023. It’s a schedule. Half of the Federal Reserve staff expected at least one, but previously there was no consensus on a rate hike in 2022. At the end of the two-day meeting Wednesday afternoon, the central bank also said that inflation is no longer a “temporary” or temporary problem that authorities believed, and rising prices could pose a major threat to the economy. You should admit that there is. The consumer price index rose 6.8% in November and could heat up again in December.  Rick Leader, BlackRock’s Chief Investment Officer for Global Fixed Income, said: The Fed launched a quantitative easing program in early 2020 to address the effects of the pandemic, reducing the Fed’s funding target to zero.

A big wildcard for the market is what the Fed says about the balance sheet, which was $ 4.1 trillion in January 2020 before the pandemic, but has grown to $ 8.7 trillion. When securities mature on their balance sheets, the Fed replaces them and buys billions of dollars in US Treasuries each month.

“It’s very surprising to the market to say that it’s coming out and you don’t have to maintain this level of size,” Leader said. He said the Federal Reserve is likely to cut its balance sheet after raising interest rates.  However, the Fed’s final reduction in its balance sheet could have a greater impact on the market than a rate hike, he said.

Goldman Sachs economists outlined the final voting scenario in the opinion that it may be less conservative than the last cycle after the financial crisis. If the Federal Reserve simply matures the securities, outflows will begin, and if they do not replace them, the balance sheet will begin to shrink. “We anticipate that the fourth rate hike will take place in 2023H1, so at this point we expect settlement to begin at that point. According to an accounting policy survey, interest rates, general financial conditions, the impact of outflows on growth and inflation should be modest and much less than expected rate hikes, “they wrote in a memo.”But in the past, the market has responded strongly to the reduction of balance sheet adjustments.” Grant Thornton’s Chief Economist Diane Swonk hopes the Fed will discuss balance sheets at this conference.