Inflation & Rates – What Will The Fed Do?

December’s US CPI came in at 7%. On a monthly basis, it has increased 0.5% and 7% was the annualized increase. This was the fastest spike in 40 years. Core inflation increased 5.5% YoY and 0.6% from the previous month. The 10 years at the end of 2021 was at around 1.5% and is at 1.793% at the time of writing, nearly 2 weeks into the New Year. Rate hikes may have already been priced in. Analysts expect a near term pause in the 10 year’s movement but it is expected to end 2022 closer to 2%.

The chairman of the Fed has stated that interest rate hikes along with a reduction in monetary support are necessary to control inflation and that the US economy is healthy and in need of a tighter monetary policy. Some analysts have exercised a need for caution as the situation with the virus is still unclear.

It would be interesting to see how liquidity is controlled when the Fed fully stops purchasing assets. It may be a while before they actually start to reduce liquidity from the current $8.80 trillion. The FOMC will take a decision on January 26th 2022 and the one after comes in March 2022.

Keep a close watch here for the outcomes from the January meeting.