The Fed allowed a rate hike to 0,9% in 2022 year due to high inflation

ФРС допустила повышение ставки до 0,9% в 2022 году из-за высокой инфляции

The Fed summed up the results of the regular meeting. The Bank will accelerate the reduction of incentives and, probably, will start raising the rate in the first half of 2022.

The rate will be raised, but not now

The regulator will accelerate the reduction of monthly purchases of bonds. So, in December, purchases will amount to $ 90 billion, in January — 60 billion. If the Fed doesn't change its policy in the future, in February, purchases will decrease by another 30 billion, and in March, the easing program will end.

After that, in the first half of 2022, the central bank may begin to raise the interest rate., which is still near zero. At the meeting, the commission voted to raise the rate in 2022 to 0,9%, in 2023 — until 1,6%. Recently, in September, the regulator planned to raise the rate in 2022 only up to 0,3%, and in June even wanted to leave it near zero..

How did the rate forecasts change in 2022

March 0,1%
June 0,1%
September 0,3%
December 0,9%

0,1%

Inflation is no longer temporary

The Fed is forced to reduce incentives and move to raise the rate due to high inflation, which in November was 6,8%. This is a record for the last 40 years level. So, compared to last year, food prices increased by 6,1%, on new cars — on 11,1%, on used cars — on 31,4%, for gasoline — for 58%.

Such an increase in prices was caused by the increased demand of consumers., lack of supply, caused by supply chain disruptions, and other factors. Since the beginning of the year FED Jerome Powell called inflation temporary, but only in December recognized, it is not so.

According to the commission, in 2021, inflation will be 5,3%, in 2022 — 2,6%. These estimates have changed a lot since March., after all, then the commission expected price increases by the end of 2021 only by 2,4%.

ФРС допустила повышение ставки до 0,9% в 2022 году из-за высокой инфляции

How inflation forecasts have changed in 2021

March 2,4%
June 3,4%
September 4,2%
December 5,3%

2,4%

What's with the stocks

The market reacted positively to the decision of the regulator. Grew more than the rest Nasdaq, which includes rate-sensitive technology companies, - on 2,2%. S indices&P 500 and Dow Jones added 1,6 and 1,1%.

  trading on the NYSE & NASDAQ 2010-05-15 10:38:58

One of the reasons for this growth is the lack of uncertainty., which was before the meeting. The Fed finally recognized the problem in the form of high inflation, but did not make radical decisions. Probably, markets could only fall hard in one case.: if the bank raised the rate now.

The bank will hold its next meeting in March, when he finishes buying bonds. And if inflation doesn't go double-digit, not excluded, that the Fed will postpone the rate hike until the June meeting..

A lot can happen in these six months.. for example, more dangerous strains of COVID-19 may appear and the economy will be closed again for quarantine. In such a situation, the Fed will not risk tightening the policy and will again postpone the decision on the rate.. This probability encourages investors to continue to invest in stocks..

And what does the bet have to do with it??

The bank's soft monetary policy is one of the main drivers of stock market growth. In March last year, the countries were closed for quarantine, a S&P 500 fell by 30%. Then the Fed lowered the rate to the level of 0-0.25% and announced a quantitative easing program.. The stock market began to grow and by August 2021 doubled..

With the rate, the yield of safe instruments such as deposits and bonds fell.. To make a profit, investors transferred savings to stock market, which led to the growth of shares. Even near-zero rates allow companies to take loans at low interest rates. It becomes easier for them to finance their growth and increase profits..

But with the growth of rates, it will be more difficult for debt-indebted companies to pay off the debt.. Yields on deposits and bonds will also grow, and the risk premium for owning expensive stocks will fall. That's why investors are following the Fed's decisions so closely..

ФРС допустила повышение ставки до 0,9% в 2022 году из-за высокой инфляции

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