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FOMC Preview: Final Asset Purchase Announcement Expected; Hints at “Liftoff” in March

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Expectations are the FOMC will announce their final asset purchases at the meeting this week.

There might be some economic weakness in the first couple months of 2022 related to the pandemic, but the FOMC appears poised to look through that weakness.

From Merrill Lynch: “The Fed will announce the last round of asset purchases at the January FOMC meeting, which is well anticipated. We believe Chair Powell could continue to pivot hawkishly during the press conference.”From Goldman Sachs: “The FOMC is likely to use its January meeting next week to hint at a March liftoff and to begin formulating a plan for balance sheet reduction. We expect the FOMC to raise interest rates four times this year starting in March and to announce the start of balance sheet reduction in July.”For review, for most of last year the FOMC was purchasing “at least $80 billion” Treasury securities per month and “at least $40 billion” agency mortgage‑backed securities (MBS) per month.

In November, the FOMC started to taper their purchases.  The FOMC announced a reduction in their purchases to “at least $70 billion” Treasury securities per month and of “at least $35 billion” agency MBS per month. They also announced a further reduction in December to “at least $60 billion” Treasury securities per month and of “at least $30 billion” agency MBS per month.

In December, the FOMC announced an acceleration in the taper, and reduced their purchases to “at least $40 billion” Treasury securities per month and of “at least $20 billion” agency MBS per month starting in January.  A similar reduction in asset purchases in February (to $20 billion in Treasury securities and $10 billion in agency MBS) seems likely – and that would be the final asset purchases.

Analysts will be looking for comments on rate hikes (likely in March), runoff of assets (not reinvesting), and possibly even comments on future balance sheet reduction. 

Note: No projections will be released at this meeting.  However, for review, here are the Here are the December projections.  In December, most participants expected 3 rate hikes in 2022.

Wall Street forecasts are for GDP to increase at close to a 6.0% annual rate in Q4 that would put Q4-over-Q4 close to the December projections.

GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1Projection Date2021202220232024 Dec 20215.5 3.6 to 4.52.0 to 2.51.8 to 2.0 Sept 20215.8 to 6.03.4 to 4.52.2 to 2.52.0 to 2.2 1 Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 3.9% in December. That put Q4 unemployment close to the December projections.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2Projection Date2021202220232024Dec 20214.2 to 4.33.4 to 3.73.2 to 3.63.2 to 3.7 Sept 20214.6 to 4.83.6 to 4.03.3 to 3.73.3 to 3.62 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of November 2021, PCE inflation was up 5.7% from November 2020.

So, inflation was above expectations in Q4.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1Projection Date2021202220232024Dec 20215.3 to 5.42.2 to 3.02.1 to 2.52.0 to 2.2 Sept 20214.0 to 4.32.0 to 2.52.0 to 2.32.0 to 2.2
PCE core inflation was up 4.7% in November year-over-year.

Core inflation was also above expectations in Q4.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1 Projection Date2021202220232024Dec 20214.42.5 to 3.02.1 to 2.42.0 to 2.2Sept 20213.6 to 3.82.0 to 2.52.0 to 2.32.0 to 2.2

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