US Federal Reserve Bank to Consider Earlier Interest Rate Hikes in 2022

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US Federal Reserve Bank To Consider Earlier Interest Rate Hikes In 2022

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  • US Fed meeting minutes from December published this week
  • Reveals consideration to hike up interest rates sooner, while shrinking balance sheet
  • US Fed update seen bring S&P500 and ASX indexes lower by up to 1.9 and 0.3 per cent

Indications that the US Federal Reserve Bank could possibly raise their interest rate policy sooner than later in 2022 have freshly surfaced upon the publishing of its December meeting’s minutes just this week. Within the meeting minutes published on Wednesday, analysts note a mounting eagerness among US Federal Reserve officials to hasten a raised cash rate in light of additional inflation risk.

While the central bank had earlier in September maintained its commitment to low interest rates at 0.15 per cent, this latest decision to raise short-term rates sees the Fed maintaining a cautious balancing act of addressing mounting inflation without causing needless strain on still-recovering business activity. At its highest level in 39 years, US inflation rates are tracked at 6.9 per cent since November 2021, with domestic producer prices expected to rise sharply, following suit.

The Fed’s major shift in attitude towards bringing interest rate hikes forward mirrors its commitment to address inflation as a priority concern ahead of 2022. The sentiment arises from inflation not as a transitory economic effect, but the direct result of supply chain problems and correlating consumer demand brought about from global bottlenecks and other disruption caused by the pandemic. Strengthening employment figures and economic activity are also among indicators noted during the meeting, as reasons to warrant an earlier interest rate hike.

Fed officials additionally signalled the consideration of shrinking its US $8.67 trillion balance sheet along with the proposed raising of interest rates. As the Fed is scheduled to meet once more at the end of January, and later in March, speculation holds that the first interest rate hike of 2022 could possibly be instated as early as in March. Reasonably, inflation fears stimulated discussion and the growing inclination towards an earlier raising of interest rates. However, potential risks brought about by the continuing spread of the Omicron variant were also a prominent theme during the meeting, despite most officials not anticipating any drastic effects it could produce upon the economy.

The rapid rise of Omicron transmissions throughout the US have sparked fresh concerns on increasing inflation risks, especially with rising housing prices and potentially prolonged global supply bottlenecks already threatening to impede global and domestic economic recovery. While economists are on the fence about its ability to significantly derail retail recovery, its effects undoubtedly present lingering uncertainty for the US market at-large.

Fed Meeting Minutes Produce Correlating Dips to US and Australian Indexes

Once published, the latest Fed meeting minutes saw the S&P 500 index tracking lower by up to 1.9 per cent — noted as its biggest loss since November. Further to the market development, analysts read an 80 per cent chance of a 25 basis-point hike to come with the Fed’s planned meeting in March.

Market effects were similarly seen with Australian shares expected to open lower following the Fed update. The ASX futures market saw a dip by 0.8 per cent, while the Australian dollar likewise tracked lower by 0.3 per cent.

Louis Mosmann

Louis Mosmann is a Private Wealth Client and Research Assistant at KOSEC- Kodari Securities. Louis covers macroeconomic events, global markets and ASX300 company announcements, allowing clients to make more informed investment decisions. Email Louis at l.mosmann@kosec.com.au.

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