Fed Rate Hikes & Risks Of Financial Instability – Part II

What if the Fed can’t hike rates? It’s an interesting question and one we delved into in Part 1 – “Fed Won’t Hike Rates As Much As Expected.”

With the January FOMC meeting now behind us, we have much better visibility about the Fed’s intentions.

“With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate.”FOMC

The post-meeting statement from the Federal Open Market Committee (FOMC) did not provide a specific time frame for increasing the overnight lending rate. However, there are many indications that such could happen as soon as the March meeting. As shown in the charts below courtesy of “The Daily Shot.”

Fed Rate Hikes, Fed Rate Hikes & Risks Of Financial Instability – Part II

About the Fed’s “Quantitative Easing” program, the FOMC noted its bond-buying program would fall to just $30 billion in February, down from $120 billion a month in 2021. In addition, the Fed will terminate purchases in March consistent with an increase in interest rates.

Interestingly, there was no specific indication of when the Fed might start to reduce its nearly $9 trillion balance sheet. The most significant risk to equities is the contraction of liquidity from “Quantitative Tightening. Such is what preceded the market rout in 2018.