Question
There has been much speculation about the actions that the Fed will take at its upcoming March 15-16 meeting. While the pandemic raged, the Fed
There has been much speculation about the actions that the Fed will take at its upcoming March 15-16 meeting. While the pandemic raged, the Fed doubled down on its guidance to maintain near-zero interest rates and monthy purchases of $120 billion in Treasury and mortgage bonds. Many economists were caught off-guard by the rapid recovery of the economy as it reopened last year. When inflation surged as a result of brisk demand and supply chain bottlenecks, it was initially dismissed as a temporary imbalance in a few markets. Instead, the price pressures broadened. At the same time, unemployment fell much faster than expected, to 4% last month (from nearly 15% at the height of the pandemic), and wages also began to ratchet higher. In February inflation was reported at an annual rate of 7.5%, the highest rate in four decades. Fed Chairman Jerome Powell has been publicly quiet since January, when he first hinted at the possibility of a faster path of rate increases owing to the inflationary pressures. His thoughts may be clarified when he reports to Congress on the economic outlook this week (March 2-3). Meanwhile, St.Louis Fed President James Bullard has called for a full percentage point increase in the key Fed funds rate by June, including at least a half percent increase in March.
Has the Fed waited too long to pivot away from accommodative monetary policy, requiring them to be more aggressive now?
Has anticipation of a more aggressive Fed policy change already been priced into the bond and equity markets?
Which sectors of the capital markets will be most affected by a tightening of monetary policy?
What is the risk that an aggressive tightening will result in a recession?
Does the Fed have an action plan to shrink its bond holdings (now north of $9 trillion!)
Will the conflict in Ukraine and the economic sanctions on Russia complicate the Fed's efforts?
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