Think the Federal Reserve Is Already Tightening? Not So Fast

Dec 22, 2021

Think the Federal Reserve Is Already Tightening? Not So Fast

There has been a lot of loose talk about the Federal Reserve tightening — much of it incorrect.

To begin, the Fed's actions do not represent monetary policy tightening, which will occur months from now.

Second, the widely anticipated tightening of short-term interest rate policy will be far from a tightening of monetary policy.

Finally, what is not appreciated is that a true tightening of liquidity in 2022 might result from an outright decrease of the central bank's balance sheet. That is not on the market's radar, but Fed watchers in the know are discussing it.

To begin, the Fed continues to ease monetary policy by purchasing Treasury and US agency securities, albeit in smaller quantities. Last week, the Federal Open Market Committee stated that it would reduce its monthly purchases of Treasuries and mortgage-backed securities by $20 billion and $10 billion, respectively, to $40 billion and $20 billion in January. At that rate, the Fed will complete its bond purchases in March.

Central bank purchases may be thought of as filling a bathtub; they give liquidity to the financial system by acquiring assets from investors, who subsequently invest the proceeds elsewhere. The faucet remains open, and the tub continues to fill. (Hold that concept for now.)

Thus, the Fed continues to extend its balance sheet, which had doubled to $8.7 trillion since March 2020, when it implemented emergency operations to counteract the pandemic's economic and financial repercussions. This is mostly due to the fact that it increased its holdings of Treasuries and MBS to $5.6 trillion and $2.6 trillion, respectively.

Once those improvements are complete, the Fed can proceed with raising the federal fund's target rate from its current floor of 0% -0.25%. (While this is not theoretically impossible, hiking the Fed's key rate while continuing to buy securities is like driving with one foot on the turbo and the other on the brake.) Even then, the Federal Reserve's policy will remain quite accommodative. According to the FOMC's "dot plot," the key rate would remain below its ostensible long-run inflation objective of 2% through 2023.

And, in a speech, last Friday, Fed Governor Christopher J. Waller stated, "I anticipate a rise in the federal-funds rate target range would be justified shortly after our asset purchases conclude." While Waller is the most recent appointment to the Fed's board, his views should be given additional weight as the previous director of research at the St. Louis Fed.

According to the CME FedWatch website, the fed-funds futures market believes liftoff should begin with a quarter-percentage-point rise in the target range, to 0.25 percent -0.50 percent, at the May 3-4 FOMC meeting, with a virtual coin flip for a hike at the March 15-16 confab.

More provocatively, Waller stated that the process of shrinking the balance sheet (i.e., draining the metaphorical monetary tub) might begin next year, far sooner than most Fed watchers and market players anticipate.

"I see no reason to postpone balance sheet correction," he explained. "I believe we can move much sooner and much more quickly" than the Fed did in 2014, he continued, as MarketWatch reported. That would be the No. 1 surprise for next year, according to Matthew Hornbach, global head of macro strategy at Morgan Stanley, who issued a Top 10 list last Friday.

Subscribe Our Newsletter

B2CORE Android 2.4.0 & iOS 1.28.0

Hazem

B2CORE News: Android 2.4.0 & iOS 1.28.0 Update Offers Better Trading Experience

The new B2CORE Android 2.4.0 & iOS 1.28.0 release offers a better one-click trading experience, reliable security features, and fresh-looking interfaces.

Companies
Here's a Strategy for Betting on Nvidia's Best AI Stocks Without Buying It.

Milena

Here’s a Strategy for Betting on Nvidia’s Best AI Stocks Without Buying It.

Here's an options strategy for ambitious investors looking to capitalize on Nvidia's best AI stocks rise.

Companies
B2BROKER Liquidity B2BROKER Liquidity
Sponsored
Alexander

Full Bitcoin Price History: From 2009 to 2022
Bitcoin is the most prominent cryptocurrency in circulation today, accounting for more than 41% of the crypto sector – although compared to the centuries-long US stock market, it is still in its infancy.

discover
Guide to Craiyon: How To Use a New DALL-E Mini

Tamta

Guide to Craiyon: How To Use a New DALL-E Mini

Soon after OpenAI's inception, Google released Imagen, a direct rival that uses OpenAI's open-source code to build similarly stunning AI graphics that can again make images from basic sentences.

Fintech
Contact us bg

Contact Us

Contact the Liquidity Provider
for any questions and advertising inquiries

    Please fill out this contact form to get in touch with us

    / 3000

    By clicking “Get in touch” button, you agree to the privacy policy

    Successful!
    Thank you for your request.
    We will contact you shortly.
    Close

    Constantine

    Top 3 Liquidity Challenges Facing New Exchanges and How to Solve Them

    Top 3 Liquidity Challenges Facing New Exchanges Today

    Constantine

    Financial Planning in the Cryptocurrency Era — Master Crypto and Digital Asset Strategies

    Financial Planning in the Cryptocurrency Era

    Hazem

    Best Platforms to Trade Perpetual Futures in 2025

    Best platforms to trade perpetual futures in 2025

    Alex

    Top 10 Fintech Website Development Agencies for 2025

    Best Fintech Website Development Agencies for 2025

    Сonstantine

    Internal vs External Range Liquidity In ICT Trading Explained

    Internal vs External Range Liquidity In ICT Trading

    Constantine

    Portfolio Backtesting — Tools, Metrics, and Methods Explained

    Portfolio Backtesting

    Сonstantine

    ICT Trading Explained: Smart Money Concepts, Tools and Setups

    ICT Trading Explained

    Сonstantine

    CFD Trading Strategies: A Practical Guide to Risk and Execution

    CFD Trading Strategies

    Alexander

    What is a Fair Value Gap? A Guide to Trading Market Imbalances

    What is Fair Value Gap

    Vitaliy

    Triangle Patterns in Trading: Mastering Ascending, Descending & Symmetrical Strategies for Maximum Profit

    Triangle Patterns in Trading: Ascending, Descending & Symmetrical Guide

    Alexander

    What Is COTI? Payments, Token & Price Prediction

    What is a COTI coin

    Constantine

    Best Copy Trading Software in 2025

    Best Copy Trading Software in 2025

    Alex

    What Is an AI Agent? The Future of Finance Explained

    AI Agent Explained

    Constantine

    How to Start a Liquidity Provider Business?

    How to Start a Liquidity Provider Business

    Constantine

    How to Start a White Label Brokerage?

    How to start a white label brokerage

    Constantine

    How to Start a Multi-Asset Brokerage?

    How to Start a Multi-Asset Brokerage

    Hazem

    Crypto Ransomware – How They Happen and How to Avoid Them

    Crypto ransomware explained

    Constantine

    Best Web3 Browsers in 2025

    Best Web3 Browsers

    Constantine

    Best DAO Projects in 2025

    Best DAO projects in 2025

    Alexander

    Crypto Nodes That Pay: Your 2025 Guide to Top Passive Income Opportunities in Crypto

    crypto nodes that pay

    Alex

    Pi Network: Scam or Groundbreaking Crypto? The Full Analysis

    Pi Network Explained

    Constantine

    Triple Net Lease: Meaning, Benefits, and Strategies Explained

    Triple Net Lease

    Constantine

    Hanging Man Pattern: How to Identify and Trade It Effectively

    Hanging Man Pattern

    Alex

    5 Infinite Banking Mistakes That Could Cost You Thousands

    Infinite Banking Mistakes to Avoid
    liquidity-provider-logo
    • News
      • Stock Market Forecast
      • Stocks
      • Banks and Finance
      • Companies
      • Crypto
      • Forex
      • AI
      • Technology
      • DeFi
      • NFT
    • Articles
      • Crypto Payments
      • Trading
      • Crypto Exchange Business
      • Forex Business
      • Fintech
      • Liquidity
      • FinTech Awards
      • Blockchain
      • Investing
      • NFT
      • DeFi
    • More
      • Videos
      • Liquidity Providers List
      • Crypto Payment Providers
      • White Label Brokerage Platforms
      • Broker CRM Platforms
    [email protected]

    © 2024 Liquidity Provider. All Rights Reserved

    Privacy Policy Cookie Policy
    This site is registered on wpml.org as a development site. Switch to a production site key to remove this banner.