The next FOMC meeting will be held on November 16, and it comes just before a major release of recent inflation data. According to the Fed’s preferred inflation gauge, consumer prices rose 6.2% in August. This was well above the central bank’s 2% target. Another report showed producer prices rose 0.4% in September. This is a worrying sign. In addition, President Joe Biden recently met with Fed Chairman Jerome Powell and discussed the need for quantitative tightening to combat inflation.
Fed’s Quantitative Tightening Program
What exactly is quantitative tightening? It is the process of reducing the Fed’s balance sheet. This is done by allowing bonds to mature and not replacing them in full. This process will reduce the amount of money in the economy and should slow economic growth. This decision by the Fed comes at an awkward time for investors. According to the latest American Association of Individual Investors survey, confidence in the short-term direction of the stock market is lower than 20 percent.
In the meantime, it is important to note that the Federal Reserve is not in a rush to tighten its policies. In addition to raising interest rates, it is also reducing its balance sheet. Both of these moves would affect the bond market.
Fed’s Target Range For Federal Funds Rate
On Wednesday, the Federal Reserve raised its target range for the federal funds rate by 75 basis points. The decision came as the Fed faces a battle against persistently high inflation. The Federal Reserve said it would increase rates further if necessary to keep inflation under control. The Fed also said further increases would be “appropriate” and projected that the rate would reach the midpoint of its target range by year’s end. Click here to know all about the when is next fomc meeting.
The federal funds rate has fallen to its lowest level since the Great Recession and the financial crisis of 2007-08. In December 2018, the Fed gradually increased the rate to 2.25 percent. They maintained this level until July 2019. In July and September 2019, the Fed lowered the target range by 25 basis points.
Fed’s Projected Path For Inflation
At the next Fed policy meeting, the Fed will present its projected path for inflation. This will give investors a clearer picture of whether the Fed is being aggressive enough to push interest rates higher. It will also show if the economy has begun to show cracks in its resistance to higher inflation. Policymakers are unlikely to project an outright recession, however.
In determining the projected path for inflation, the Fed will use a system known as the SEP. The SEP measures the opinions and perspectives of participants who make up the FOMC. It is a consensus-driven organization, and only twelve members vote at each meeting. While SEP does not represent a clear indication of the Fed’s policy, it does provide timely quantitative information on the range of views expressed on the committee.
Fed’s Recent Rate Hikes
Market participants expect the Fed to raise interest rates on July 27. This hike will be 75 bps, or 0.75 percentage points. The Fed is trying to strike a balance between cooling the economy and preventing inflation. The strong labor market is a fundamental on the Fed’s side in this battle. But this strong labor market is also susceptible to the effects of interest rate hikes. The Federal Reserve has raised the federal funds rate five times this year. It is hoped that these rate hikes will curtail consumer demand, which has been outpacing supply and pushing prices higher. However, these increases have already had a negative impact on the housing market, which has seen falling home sales. In the wake of the 2008 financial crisis, the Federal Reserve sought to bring the financial markets back to normalcy.
They stopped buying Treasury bonds and started gradually raising interest rates, which were below zero for nearly a decade. They also launched several rounds of asset purchases, which increased their balance sheet to more than $4.5 trillion by the end of 2014.
The Bottom Lines
However, the Federal Reserve does not have a clear objective for maximum employment. Its policymakers’ stance on this issue largely depends on nonmonetary factors that change over time and may not be directly measurable. Therefore, they may base their policy responses on an assessment of the unemployment rate after past shocks and new shocks.
