Federal Reserve holds rates at near-zero, signals hike 'soon'

Yahoo Finance's Brian Cheung breaks down the Fed's monetary policy decision to hold interest rates at near-zero, its economic projections, and the outlook for raises to the federal funds rate.

Video transcript

ALEXIS CHRISTOFOROUS: All right, we've got that Fed decision, our Brian Cheung standing by. Brian, what can you tell us?

[AUDIO OUT]

BRIAN CHEUNG: --opting to hold interest rates at near zero in the meeting. The announcement just crossing the wires now. The Federal Reserve describing economic conditions very similarly to the way that they described it in December. In fact, very little changes in terms of the actual language describing the economic activity. They noted that the sectors most adversely affected by the pandemic have improved in recent months, but are being affected by the recent sharp rise in COVID-19 cases, of course, referring to the omicron variant. But they did continue to note that job gains have remained solid.

And the real money quote in the new statement is, quote, "With inflation having well above-- with inflation being well above 2%, the committee expects it will soon be appropriate to raise the target range for the federal funds rate." So again, the Fed not raising interest rates today, but that language seems to suggest that they are teeing up an interest rate increase very soon, perhaps as soon as the March meeting.

Everything else in the statement is pretty much the same. The Federal Reserve is continuing to march on their path with regards to the asset purchase program, which they hope to bring to a full stop by early March. That is untouched in the decision today. But what is interesting is the Federal Reserve released a statement alongside the regular policy statement explaining their principles for reducing the size of their balance sheet, again, which is getting close to $9 trillion, as you see the chart ahead of you.

Now, again, the Fed is not doing that today. Down the line, however, the Fed says through this document, after they began raising interest rates, they will start to think about how they can actively allow their balance sheet to start to shrink.

So how will they do that? Well, the principles as detailed in this document note that they'll really allow this to happen in the same way that they did in the lead-up to the COVID-19 pandemic, in addition to the US-China trade war, where they were allowing the balance sheet to shrink by allowing maturing assets to simply fall off of their balance sheet and not reinvesting them into new US treasuries or agency mortgage-backed securities in replacement of those that mature. They just simply let them roll off, and then the balance sheet shrinks.

Now what's interesting about that is there was chatter before this meeting that maybe the Federal Reserve would start to get more aggressive with its balance sheet rolloff by actively selling its assets into the open market in the same way that they were openly buying them through the quantitative easing process. The statements based off of what I'm reading doesn't appear to lean towards that direction. It would be a little bit more of a passive process than an active process in terms of letting those assets shrink.

So very inside baseball stuff, but something that could be very consequential after the Fed eventually raises interest rates, which might be a conversation for perhaps the summer or the fall of later this year. But again, the actual FOMC policy statement itself, not much new in there beyond the very quick and important sentence that they will be ready to start raising interest rates sometime soon.

By the way, guys, this decision was unanimously agreed to by all of the voting members of the FOMC, including some of the more hawkish members that we have been talking about ahead of this decision. We'll see if the Fed chairman Jay Powell has any interesting color to add in addition to this commentary later at 2:30.

KARINA MITCHELL: Yeah, absolutely. And then, Brian, how carefully measured does Powell have to be in his comments today at that presser?

BRIAN CHEUNG: Yeah, very careful because it seems like markets could be particularly sensitive. Now I'm looking at what's going on in the bond market right now that's going to be really important because the Fed wants to pay attention to the shape of the curve as they start to tighten policy. But the 10-year not really moving too much. I'm taking a look at the 10-year at still around 179 basis points. Of course, this could be moving very quickly.

But when it comes to the Fed chairman, he is very aware of the fact that financial conditions are going to be particularly important, as the Fed starts to continue to messaging its commitment to really tightening its policy. Again, the pandemic era easy money indeed may have been a contributor to the large inflationary increases that we've seen which have spurred the Fed to go into this more tightening mode.

But the Fed chairman wants to balance not making sure that they're so aggressive where it could put an abrupt stop to the recovery and perhaps launch us into another recession via an inverted yield curve, but at the same time, messaging they're serious enough about tightening that inflationary pressures and inflation expectations will go down because of higher borrowing costs, at least from the Federal Reserve's interest rate hikes. So that balance is indeed going to be an interesting challenge, which we'll see him tightrope walk in a few minutes.

KARINA MITCHELL: All right, Brian Cheung, thank you so much for that report.