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Federal Reserve policymakers explained what they plan to do in their comments on Wednesday until April 23. They are expected to raise rates by 50 basis points at this and likely subsequent meetings, and they will begin shrinking the central bank’s balance sheet in June.

The federal funds rate target range is currently between 0.25% and 0.50% after the Federal Open Market Committee raised the benchmark rate range by 25 basis points at its March meeting, its first increase since 2018.

“For the first time in 22 years, the Federal Reserve is poised to raise interest rates by more than a quarter of a percentage point, and in back-to-back meetings for the first time in 16 years,” he said. said Greg McBride, chief financial analyst at Bankrate. The FOMC consensus points to a half-point rate hike, with more to come if the Fed seeks to push benchmark rates to 2.5% by year-end, it said. -he adds.

The question isn’t whether the Fed should be hawkish, it’s “only a debate about the right hawkish approach,” Evecore ISI’s Krishna Guha and Peter Williams wrote in a note to clients.

The strength of the labor market is supporting the expected increase, which is larger than usual. On Tuesday, the US Department of Labor said job postings in March reached 11.5 million, the highest since it began collecting data in 2000, from 11.3 million in February. The job creation rate of 7.1% increased slightly from 7.0% the previous month.

The balance sheet counts: The rate hikes “will occur as the Fed simultaneously begins the long-awaited reduction in its balance sheet, which we expect will decline by nearly $3,000,000 through the end of 2024, from $8.93 million today. ‘today’. wrote RSM’s chief US economist, Joseph Brusuelas, in a note. He also expects the Fed to raise its key rate to at least 2.5% by the end of the year.

So far, the Fed only seems willing to let maturing Treasury securities and mortgage-backed securities off its balance sheet. If the FOMC feels the need to take stronger measures to control inflation, it could consider selling certain securities.

“I think he (Fed Chairman Jerome Powell) will say that asset sales are a tool that could be used in the future, but remind us that the plan is to use interest rates as the main policy tool; QT works in the background and the rate path will be adjusted as needed given the QT,” said Tim Duy, Chief US Economist at SGH Macro.

He expects at least four 50 basis point rate hikes in the Fed’s quest to restore price stability. “Powell probably doesn’t want to stoke hopes of a 75 basis point hike, but if he gives credence to this story, even accidentally, market participants will rush to price 75 basis points for the June meeting,” Duy wrote in a note to clients.

Geopolitical risks: Will heightened risks from the Russian-Ukrainian war and Covid lockdowns in China lead the Fed to ease its tightening? Not likely.

“We believe the Fed recognizes that the war/Europe and China/Covid lockdowns are significant and pose risks to both growth and inflation,” said Krishna Guha and Peter Williams of Evercore ISI. “But the FOMC will remain focused on the risk of upside domestic inflation, react early on to possible new global inflationary pressures, and only respond to fallout from weak global growth and the TFI tightening as and as they materialize.”

For US households, the implications of rate hikes are clear. Borrowing will cost more and saving will yield more. “It hints at the steps households should take to stabilize their finances – paying down debt, especially expensive credit cards and other variable-rate debt, and boosting emergency savings. Both will make you more resilient. to rising interest rates, and whatever happens next economically,” said McBride of Bankrate.

For banks, higher rates increase their net interest income, but “the rapid rise in the lower end of the (yield) curve has reached GAAP book value,” wrote a group of equity analysts led by Betsy Graseck. In addition, tighter financial conditions would slow loan growth over time. And the Fed’s balance sheet reduction will also slow deposit growth. In addition, the sharp rise in rates will affect banks’ capital ratios.

Thus, Morgan Stanley analysts are reducing their share buyback estimates for banks. “We believe management teams will be more cautious with share buybacks going forward. We are reducing our buybacks for the remainder of 2022 by 40%,” they said.

SA contributor John M. Mason sees a 50 basis point rise on Wednesday followed by at least two more moves this year.

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