2022

By Ann Saphir

WASHINGTON (Reuters) – The Federal Reserve on Wednesday is expected to raise interest rates by half of a percentage point and announce the start of reductions to its $9 trillion balance sheet as U.S. central bankers intensify efforts to bring down high inflation.

Fed policymakers have widely telegraphed a double-barreled decision that would lift the Fed’s short-term target policy rate to a range between 0.75% and 1%, and set in motion a plan to trim its portfolio of Treasuries and mortgage-backed securities (MBS) by as much $95 billion a month.

The policy statement is due to be released at 2 p.m. EDT (1800 GMT) following the end of the Fed’s latest two-day meeting.

Markets have priced in further rate increases through this year and into next, including at least a couple more half-percentage-point hikes, as traders bet the central bank moves much more quickly than it had anticipated it would in March to get borrowing costs up to where they will start actively curbing inflation.

With no fresh Fed economic or policy rate projections due until the central bank’s June meeting, most clues on how far and how fast it is prepared to go will come from Fed Chair Jerome Powell’s news conference, which starts at 2:30 p.m. EDT.

‘SOUND HAWKISH’

The Fed began its current round of policy tightening in mid-March with a quarter-percentage-point rate hike, smaller than many policymakers had wanted given inflation had hit a 40-year high, but calibrated so as not to inject more uncertainty into global markets roiled by Russia’s Feb. 24 invasion of Ukraine.

In the weeks since that decision, inflation has gained new steam as the war pushed up oil and food prices and China’s strict lockdowns to combat the spread of COVID-19 further disrupted supply chains.

Data on the U.S. labor market also suggests increasing labor market tightness, with employment costs surging as businesses struggle to hold onto workers. A record number of job openings may also translate to higher wages that could also feed through to inflation.

All that is ratcheting up the pressure on the Fed to act more decisively to rein things in.

“Powell will continue to have a strong incentive to sound hawkish,” Piper Sandler economist Roberto Perli said this week. “The Fed’s focus these days is 100% on bringing inflation down, and hawkish expectations help that cause.”

In the run-up to this week’s meeting, Powell has said he wants to get rates “expeditiously” to what Fed policymakers regard as a “neutral” range of 2.25%-2.5%, and then higher if needed.

Most of his colleagues appear to be on board with at least the first part of that plan.

The aim would be to lift borrowing costs high enough and fast enough that households slow spending and businesses pare hiring in response, reducing inflation that is now about three times the Fed’s 2% target.

But the central bank wants to avoid raising rates so high or so fast that it short-circuits the labor market and trips up the economy. The U.S. unemployment rate has only just dropped to 3.6%, near the pre-pandemic level, and any large reversal could be a prelude to a recession.

The Fed has managed “soft landings” infrequently in the past, analysts say, and at this point has allowed inflation to rise so much faster than interest rates that it may have already missed its chance to do so.

A fast trip to neutral https://graphics.reuters.com/USA-ECONOMY/POWELL/zdvxogolapx/chart.png

Fed policy trails inflation by historic margin https://graphics.reuters.com/USA-FED/gdpzynrmnvw/chart.png

And while it is expected to raise rates rather quickly now to compensate, the inflation path will also depend on a number of factors beyond the Fed’s control, including the evolution of the pandemic, the war in Ukraine, and ongoing supply and labor shortages connected to both.

The Fed’s plan to reduce its balance sheet will also be a focus on Wednesday. While the broad outlines were disclosed about three weeks ago in minutes of the Fed’s March meeting, investors expect to learn details of the speed and extent of the plan, including possible MBS sales at some point in the future.

(Reporting by Ann Saphir; Editing by Paul Simao)

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By Gwladys Fouche

OSLO (Reuters) – Norway’s $1.2 trillion sovereign wealth fund is prepared for a rocky ride as it confronts the biggest geopolitical changes in three decades, its chief executive said on Tuesday.

“We probably face the greatest changes for 30 years,” Nicolai Tangen told a Norwegian parliamentary hearing, adding the world’s largest sovereign wealth fund expects “growing frictions between superpowers and a reversal of globalisation”.

Tangen said that the Norwegian fund, which invests all of its assets in foreign stocks, bonds, property and renewable energy projects, has “nowhere to hide” and must manage the risk that comes with exposure to global markets.

“We have a rocky ride ahead,” he said, adding that inflation, already on the rise before the Ukraine conflict, has continued to increase, while interest rates are still very low and share prices remain high.

Of all the risk factors, stagflation was “the worst”, Tangen said, adding it could potentially lead to a 40% fall in the fund and that it was a more likely scenario than six months ago.

“We have a combination of high price rises and lower-than-before economic growth, inflation is going up and growth is on its way down,” Tangen later told Reuters.

“It looks like we are potentially nearer a scenario of (stagflation) than we were earlier.”

Founded in 1996, the fund invests revenue from Norway’s oil and gas sector and holds stakes in 9,300 companies globally, owning 1.3% of all listed stocks.

Assets now correspond to $230,000 for every Norwegian, and the purpose of the fund is to share the proceeds of the country’s oil and gas revenues with future generations.

RUSSIA AND RENEWABLES

Norway ordered the fund to first freeze and then divest its Russian assets, worth some 27 billion crowns ($2.85 billion) and equivalent to 0.2% of its total value at the end of 2021, after Moscow began its “special military operation” in Ukraine.

However, the fund has not yet begun selling, Tangen said, adding that he did not know when this would be possible as the Moscow market was not functioning well with traded volumes not large enough for its needs.

It could not be sure who counterparties were, making it hard to avoid selling to individuals under international sanctions.

Elsewhere, the fund took its first ever direct stake in a renewable energy project, a Dutch wind farm, in April last year, but has not done so since.

Tangen said even though the fund has a mandate from parliament to invest up to 2% of its total value in renewables, it would take some time as competition was fierce and “good prospects (are) hard to find”.

($1 = 9.4587 Norwegian crowns)

(Reporting by Gwladys Fouche; Editing by Terje Solsvik, Louise Heavens and Alexander Smith)

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