Fed perspective… The strong overall picture of employment conditions in the US offers a room for movement for the Fed to move faster in monetary tightening. Beyond the fact that the peak of inflation has not yet been seen on the threshold of current dynamics, if employment and growth provide strong indicators, the Fed will see no harm in increasing interest rates rapidly. The threshold here will be the level at which economic activity indicators will not be harmed, and the criterion that the Fed should take into account when determining the terminal rate should be to maintain a targeted inflation and a reasonable growth dynamic.
Tightening plan… The Russia-Ukraine agenda is still an external economic risk. In the economic indicators of the US, the conditions regarding employment and inflation form the basis for the Fed to increase interest rates 6 more times in the remaining meetings of the year. The latest hawkish statements from within the Fed show that the May meeting will also include the balance sheet reduction plan.
Fed term funds interest pricing… Source: Bloomberg
Conclusion? It is thought that a Fed, which feels strained against inflation, may enter into an even more aggressive tightening cycle in the future. This pricing, which is reflected in the bond yields, currently shows interest rate hikes by 50 basis points in May and June on the radar. The plan to be presented here is important, as the bond portfolio that the Fed will empty together with the balance sheet reduction will constitute the main dimension of the QT. It is possible that the Fed will reach higher scales at the point of reducing assets faster than in 2017. The phenomenon that can slow down the Fed in this regard is the adverse economic risks. Although the situation originating from Russia is still minimal for the US, the inflationary dynamics created by this are a matter of further evaluation.
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