In this month’s Fixed Income note we will be taking a look at the outcomes of January’s Federal Reserve policy meet.
Indicators of economic activity and employment have continued to strengthen considerably. The federal reserve is keeping up with the decided pace of reducing asset purchases and will stop all purchases by the end of March. Job gains have been solid in recent months and unemployment has declined substantially. Supply-demand dynamics related to the pandemic and the re-opening of the economy have contributed to elevated levels of inflation. With inflation well above the ideal 2%, and employment numbers strong, we can expect the federal reserve to incrementally hike rates. The Governor has expressed the opinion that the US economy does not require monetary support. He also expressed the need to be nimble and the need to be prepared to adjust the monetary stance should risks arise. The federal reserve balance sheet has grown to around $8 trillion. This poses a concern. The chairman has also announced that reducing the size of the balance sheet will be done at an appropriate time and the federal funds rate will be the primary resource used for adjusting monetary policy.