What to expect at the upcoming FOMC meeting

The Federal Open Market Committee (FOMC) is likely to use its January meeting this week to set the stage for a rate hike in March and to begin formulating a plan for balance sheet reduction. Please find below what we expect:

• The Federal Reserve System (FED) to confirm a rate hike in March following the publication of very robust data on employment and prices.
• As uncertainty remains very high, especially on the inflation front, we expect the FED to remain data dependant regarding the pace of rate hikes in 2022.
• The FED to confirm the tapering pace ($30bn per month), with quantitative easing ending in March. We do not think the FED will end purchases abruptly at this meeting.
• We also expect the FED to give more information regarding the balance sheet runoff, without committing to a specific timeline (nor to a specific amount) to avoid any panic reaction on financial markets. The formal announcement could come during the summer, after the first two rate hikes (March and June).
• We do not expect the FED to indicate being open to the possibility of a 50bps hike in March.
• Given recent comments from FOMC members supporting the current hawkish bias of the FED (and thus market pricing), we do not expect a significant hawkish surprise at this meeting

In conclusion, the statement is unlikely to differ considerably from the December statement. Consensus seems to be leaning towards a hawkish tilt, with financials markets already short on US treasuries (short end of the curve). We expect a modest steepening of the US curve.