FED Ready for Its New Year’s Debut: Will The Prospect Of a Contraction “Scare The Market”?

The Federal Reserve (FED) is expected to announce its interest rate resolution after a two-day meeting on interest rates. However, the focus of the market has changed from interest rate to contraction.

On Friday, the Wall Street Journal reported that Federal Reserve officials were about to decide whether to allow their bond portfolios to be larger than expected before the start of the contraction. Making decisions about whether to end the list is earlier than previously expected. At the January meeting, the schedule may be the core issue.

After the FED’s chairman Powell took the lead to “succumb to the market,”  investors generally believe that the FED is likely to announce the end of the contraction after Thursday and suspend the pace of quantitative tightening.

However, Vincent Cignarella, Bloomberg’s animator, warned of the difference between the FED’s comments and market views. It may appear again at a press conference after the resolution.

“We will not hesitate to make changes,” Powell said before. However, The Federal Fund’s benchmark interest rate remains the FED’s main monetary policy tool, not its balance sheet. So the animator said that if the FED sticks to the doctrine, investors who want to see the central bank limit may be very disappointed.

The bank of America also predicted in Tuesday’s overnight newspaper that the FED would send a patient message, but the bank was still doubtful whether the FED would be as modest as the market expected.

The bank said Powell would not make any official statement on the balance sheet at a press conference to avoid disappointing some investors.

However, the bank said that Powell would at least reiterate his earlier statement that he was willing to adjust the list to the specific conditions of the economy and the normalization process.In addition, he is likely to propose technical reasons for adjusting the path of normalization of the balance sheet.

What Powell has to do is to decide how much additional details to provide to the outside world on the balance sheet framework, based on the progress of internal discussions.

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