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United States Monetary Policy January 2022

United States: Fed keeps rates at effective floor in January; speeds up tapering of its QE purchases

At its meeting on 25–26 January, the Federal Open Market Committee (FOMC) decided to hold the target range for the federal funds rate at its effective floor of 0.00%–0.25%, which was widely expected by market analysts. That said, the Fed decided to reduce the monthly pace of its net asset purchases. In February, it will increase its holdings of Treasury securities by at least USD 20 billion per month, down from USD 40 billion in January, and its holdings of agency residential and commercial mortgage-backed securities by at least USD 10 billion per month, down from USD 20 billion previously.

The Fed kept the target range unchanged due to the ongoing economic turmoil caused by the public health crisis. Despite economic activity continuing to gain momentum in recent months amid ample fiscal stimulus and progression on the vaccination campaign, the latest wave of Covid-19 has weighed somewhat on employment and output levels. Nevertheless, elevated inflation due to supply chain constraints and recovering economic activity led the Fed to reduce its monthly bond purchases, and it noted that it will end its QE program in early March.

Looking ahead, the Fed reaffirmed that it will “adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals”. The Committee noted that it expects to raise the federal funds rate at its next meeting in March, assuming there is no noticeable deterioration in economic conditions. As such, the majority of our panelists expect the Fed to hike rates at its March meeting, with further increases thereafter also penciled in.

Commenting on the outlook, Francis Généreux, senior economist at Desjardins Group, noted:

“After nearly two years of rates at their effective lower bound, the first key rate hike should happen in March, followed by at least two more in 2022.”

The next FOMC meeting is scheduled for 15–16 March.

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