Wall Street (pixabay photo)
Rafi Gozlan, chief economist at IBI Investment House, estimates that this coming Wednesday the Federal Reserve will not shock the markets and may even provide clarification on the way it chooses to reduce its formidable balance sheet, which stands at about $ 9 trillion.
“In the interest rate decision this coming Wednesday, the Fed is expected to continue to prepare the markets for the interest rate hike in March, and perhaps provide clarification on how and when to reduce the balance sheet. “They started doing the work for him, which means that the tightening of financial conditions is helping the Fed to moderate the inflation environment,” says Gozlan.
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“In recent reviews we have reiterated that despite the hardening of the tone on the part of the Fed, financial conditions have remained very favorable, hence increasing the burden of lowering inflation on interest rate instruments and reducing the balance sheet. And the potential for the beginning of the balance sheet reduction towards the middle of the year.
“However, it is important to note that there is a marked difference between the current period and episodes of negative sentiment and deterioration in financial conditions over the past decade, and that is the level of inflation. Economy and anticipate the rise in inflation.
“Therefore, when there was a deterioration in financial conditions, it was immediately followed by a halt in restraining policies or a move to expansionary policies. Today, however, policies are aimed at lowering the inflation environment that has risen significantly above target. Today, a gradual decline in the inflation environment is also required, while a prolonged deterioration in financial conditions is expected to lead to a negative wealth effect and at some point also to a fall in commodity prices, ie a moderation in commodity inflation.
“Thus, a complex situation may arise in which inflation remains relatively high despite deteriorating financial conditions, thus preventing the transition to a more favorable monetary policy,” Gozlan says.
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