Fed: Central bank ‘takes off’ soon, balance sheet reduction appropriate after rate hike


With the facts revealed at the first meeting of the year, the Fed signaled that a rate hike would be appropriate in the near future and that the balance sheet reduction would begin after the rate hike. While the central bank prioritizes the fight against inflation in the phase of withdrawing ultra-loose policies, it seems that it will apply the dynamic, fine-tuned model in relation to other economic variables, especially in balance sheet reduction. The phenomena of progress in the economy occur in a contradictory order, especially with the highest rate of 7% inflation seen since the 1980s, a labor market returning to its pre-pandemic level is in the middle, and a tightening aggressiveness that cannot interfere with the main focus of inflation narrows the comfort zone in the economy. In the monetary policy progress, the facts to be considered after this stage are as follows.


Highlights from the Fed statement;


·        With inflation well above 2% and a strong labor market, the committee hopes it will soon be appropriate to raise the target range for the federal funds rate.

·        The balance sheet reduction process will begin after the target range increase process for the federal funds rate begins.

·        The sectors most adversely affected by the pandemic have recovered in recent months, but are affected by the recent sharp increase in COVID-19 cases.

·        Risks to the economic outlook remain, including new variants of the virus.

·        The FOMC removed the previous opening line from the Central bank’s statement stating that it is “determined to use all its tools to support the US economy at this challenging time.”


In March, the Fed will raise interest rates for the first time since 2018. Key market indicators are not at a level to show an extreme reaction in terms of interest rates with different maturities. However, after the March rate hike, it is very likely that it will go beyond the 3 rate hike zones projected for the rest of the year. The position in futures funds currently shows that by December 2022, 4 rate hikes will be completed during the year. In fact, there is no direct time reference for neutral interest rates, but at the stage when asset purchases are completed and balance sheet growth is completed, an interest rate increase is theoretically appropriate and it is clear that it would not be very beneficial for the Fed to turn the table in either direction at the moment. Holding back from tightening causes them to have difficulty in controlling inflation instability, and market instability can also trigger the risk phenomenon by worrying about monetary policy failure. Besides; A tightening wheel that ignores market and economic risks will also be an approach that underestimates risks in a fuzzy environment where risks to the economic outlook are evaluated.

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