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FOMC Announcement — January 26, 2022

  • No change in short-term rates
  • Quarter point increase March 16th
  • Bond buying ending in March; wind down coming


Staying the Course

Federal Open Market Committee acknowledged their inflation and employment goals have been met. Further, they stated the bond buying program, called Quantitative Easing, will now be wound down in early March. 

The FOMC did not change short-term interest rates. The plan is to finish the bond buying program before raising rates. Fed Funds futures are pricing quarter point increases in March, June, September and December. This suggests an overnight rate at the end of December of 1.00%. 

Inflation

Commodity and wholesale goods prices have continued to move higher, causing the consumer’s cost to increase, and increasing uncertainty about longer-term rates. The 10-year US Treasury Note has already moved up to 1.80% from a recent low of 1.35% in early December 2021, based on inflation expectations. The fact that long-term rates have not moved higher points to lower long-term inflation.  The chairman stated that inflation should trend lower this year.  

What about Rates?

The Committee’s tests for raising short-term rates are 1) inflation “averaging 2% for some period of time,” and 2) “full employment.” Now that these goals have been achieved the Committee will turn its attention to raising rates. The new goal will be to lower inflation.

The side-by-side comparison of the previous meeting’s release shows “less is more”. They are still acknowledging a strong labor market and are cognizant of the impact of Covid-19 on the supply chain.

A new release this meeting was a document discussing reducing the Federal Reserve’s Balance Sheet.  After they finish buying treasuries and mortgage securities, the next step will be to reverse that process.

Comment

We look for the FOMC to raise rates one quarter point March 16th. Bond purchases will cease that month. The plan for balance sheet reductions will likely be announced later in the summer.

In his press conference Chairman Powell’s renewed fears of “will they - won’t they”. He did not rule out the chance of a half point increase or the possibility of rate increases at every meeting. Stocks headed lower on this new uncertainty.


Steve Orr is the Executive Vice President and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary’s University School of Law. Follow him on Twitter here.  Mark Frears is an Investment Advisor at Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Science from The University of Washington, and an MBA from University of Texas - Dallas.