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The plans by the FOMC to increase interest rates are also projected to be commensurate with the tapering of bond purchases by at least $100 billion monthly.
There has been a pervasive agitation in the broader market as economic observers expect the US Federal Reserve-backed Open Market Committee (FOMC) to enact at least 4 interest rate hikes this year as inflation continues to mount. While this is the general expectation, David Mericle, an economist at Goldman Sachs Group Inc (NYSE: GS) said the Fed is likely to continue increasing the interest rate until inflation figures taper down.
The resurgence of the coronavirus through Omicron has placed a lot of stumbling blocks on economic recovery in general. With restrictions underway in some countries, there has been a global strain on the supply chain, a development that is notably creating an imbalance in demand and supply, thus fueling inflationary growth.
With four-quarter percentage point hikes in interest rate imminent, the Fed may pursue a more aggressive response to the inflationary growth than expected.
“Our baseline forecast calls for four hikes in March, June, September, and December,” Mericle said in a Saturday note to clients. “But we see a risk that the [Federal Open Market Committee] will want to take some tightening action at every meeting until the inflation picture changes.”
The anticipation of the first interest rate hike, or at least, a confirmation of it has sent bearish shivers down the stock market and beyond. With companies that have enjoyed zero interest rates for about 2 years now billed to be rolled back on the economic palliative, investors have erred on the path of caution, and this is showing massive in the selloffs in tech stocks as seen since the beginning of the year.
With the Federal Open Market Committee (FOMC) meeting scheduled to commence on Tuesday, economic observers are expecting a clue as to when the interest rate hike will begin in practice, the earliest of which many are projecting being by the end of the first quarter this year, with 95% of polled traders saying the rate increment will be unveiled at the forthcoming March meeting.
FOMC Rate Outlook and Tapering Bond Purchases
The plans by the FOMC to increase interest rates are also projected to be commensurate with the tapering of bond purchases by at least $100 billion monthly. Goldman Sachs predicts this bond tapering will begin in July and is expected to run for at least 24 to 30 months. During this period, the US Balance is expected to have grown from $6.1 trillion to $6.6 trillion.
All of these macroeconomic actions are billed to have an underlying impact on the nation’s inflation outlook, and the Feds is poised to respond accordingly until it gets its desired result.
“We also increasingly see a good chance that the FOMC will want to deliver some tightening action at its May meeting when the inflation dashboard is likely to remain quite hot,” Mericle wrote. “If so, that could ultimately lead to more than four rate hikes this year.”