Weekly Market Update (31 January 2022) – Fed Chief Powell sees several rate hikes in 2022

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ByLCMS Traders FX Analysis Team

 JAN 31, 2022

(1) The Federal Reserve kept its monetary policy unchanged during its meeting last Thursday. The central bank has revised its monetary policy statement, indicating that the committee members expect interest rate hike to be appropriate soon now that inflation is well above its 2% target and that the labor market is strong. The committee also expects QE to end in early March. During the press conference, Fed Chairman Jerome Powell highlighted that there is “quite a bit of room” for rate hike without harming the labor market. Also, a statement on the reduction of bond holdings has been released, indicating that the central bank is looking forward to the unloading of its bond holdings.

(2) The Bank of Canada (BoC) held interest rate unchanged at 0.25% as opposed to the expectations that a rate hike will be carried out during its monetary policy meeting last Wednesday. Nonetheless, the BoC removed its forward guidance on policy interest rate, thus preparing for the start of interest rate hikes. The BoC also highlighted that it will maintain its bond holdings at around the same amount until the start of the first rate hike, whereby it will consider exiting from the reinvestment phase and start reducing its bond holdings. In the released quarterly economic projections, the BoC expects inflation in 2022 to be 4.2% as opposed to the previous 3.4%.

(3) The advance U.S. GDP q/q data released last week indicated that strong economic expansion took place during the fourth quarter of 2021. The economic expansion has surpassed the pre-pandemic level. In fact, its economic expansion has been the fastest since 1984. The main reason behind this strong economic expansion is the replenishment of inventories to meet the strong demand for goods.