January 25, 2022
Markets will be focused on four items from tomorrow’s Fed meeting: a signal on liftoff beginning in March, guidance on tapering, balance sheet plans and language used the press conference. Expectations have become extremely hawkish over the past two weeks with consensus falling into a wider-than-normal range. A more dovish net message and something that could cause a relief rally would be something less than 100% certainty for March liftoff. The Fed might dust off a phrase from 2016 with ‘the case for an increase in the federal funds rate has continued to strengthen.’ Guidance on the pace of tapering will probably fall to ‘data dependent.’ At the December meeting, Powell signaled the Fed would be discussing balance sheet run-off ‘at the next meeting or another meeting after that,’ so we’re more likely to get a sense on pace/sizing, rather than timing. At the press conference, Powell is expected to stay with his most recent assessment on inflation, by saying upside risks warrant an upcoming change to policy.