• “Overall, the January FOMC meeting reinforces our view that the Fed will likely need to hike more than the market is currently pricing. This should push rates higher across the US rates curve & in a bear flattening bias,”
• “USD strongly and broadly appreciated on the back of today’s hawkish FOMC decision, with gains skewed somewhat toward lower beta FX – EUR, JPY and CHF. Notably, USDJPY rose by about 2sd on the day, outperforming within the G10 complex. US dollar gains accelerated from an initially modest level post-statement release throughout Chair Powell’s press conference. We remain bullish USD vs. low beta FX and would look to buy dips on a trend basis into rate liftoff as the market further prices in a more aggressive Fed and hence additional monetary policy divergence,”

Full statement:

The Federal Open Market Committee agreed that it is appropriate at this time to provide information regarding its planned approach for significantly reducing the size of the Federal Reserve’s balance sheet. All participants agreed on the following elements:

• • The Committee views changes in the target range for the federal funds rate as its primary means of adjusting the stance of monetary policy.

  • The Committee will determine the timing and pace of reducing the size of the Federal Reserve’s balance sheet so as to promote its maximum employment and price stability goals. The Committee expects that reducing the size of the Federal Reserve’s balance sheet will commence after the process of increasing the target range for the federal funds rate has begun.

• • The Committee intends to reduce the Federal Reserve’s securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA).

• • Over time, the Committee intends to maintain securities holdings in amounts needed to implement monetary policy efficiently and effectively in its ample reserves regime.

• • In the longer run, the Committee intends to hold primarily Treasury securities in the SOMA, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy.

• The Committee is prepared to adjust any of the details of its approach to reducing the size of the balance sheet in light of economic and financial developments.

The part on the predictable runoff was in the FOMC Minutes and it’s important. It will mean that if there are $200B running off in a month, the Fed will cap it at a certain level (some speculating it will be $100 billion or less). That would mean some variable level of reinvestment. The idea is that the runoff isn’t lumpy but the inevitable conclusion — unless they sell via QT — is that the pace will be slower than a natural runoff. None of that is a surprise.

Federal Reserve issues FOMC statement

For release at 2:00 p.m. EST

• Share

Indicators of economic activity and employment have continued to strengthen. 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. Job gains have been solid in recent months, and the unemployment rate has declined substantially. Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain, including from new variants of the virus.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent. With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate. The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March. Beginning in February, the Committee will increase its holdings of Treasury securities by at least $20 billion per month and of agency mortgage‑backed securities by at least $10 billion per month. The Federal Reserve’s ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Esther L. George; Patrick Harker; Loretta J. Mester; and Christopher J. Waller. Patrick Harker voted as an alternate member at this meeting.

Implementation Note issued January 26, 2022

Last Update: January 26, 2022

• If Putin chooses to invade Ukraine, he should not be rewarded by Europe funding him any further gas income

This is such any easy thing to say but when gas and electricty prices wreck Europe’s economy, that’s a tough trade off in the real world. It’s clear to me there’s a rift between the US/UK and Germany here with the Germans unwilling to cut off their gas supplies.

• Prior was +515K
• Gasoline +1297K vs +2548K exp
• Distillates -2798K vs -1260K exp
• Refinery utilization -0.4% vs -0.4% exp

API data from late yesterday:

• Crude -872K
• Gasoline +2400K
• Distillates -2200K

The four-week rise in US gasoline inventories is the largest since the start of the pandemic but the oil market doesn’t care. A report today from Energy Intel suggested that OPEC+ thinks the recent rise in crude is geopolitical and I have a hard time arguing against that.

The focus on the day will reside on the Fed, so it may be tough to see investors gather much conviction before we get to that.

As such, European trading today may be more of a quiet one featuring little significant market moves. There isn’t anything notable on the economic calendar to shake things up, so there isn’t much headlines to work with either.

For now, the risk mood is slightly calmer with US futures up a touch but that comes after the drop yesterday. Meanwhile, the dollar also saw gains trimmed in overnight trading and is keeping more mixed at the moment. That said, changes are light in FX and may likely keep that way until we get to the Fed.

0745 GMT – France January consumer confidence
0900 GMT – Switzerland January Credit Suisse investor sentiment
1200 GMT – US MBA mortgage applications w.e. 21 January

That’s all for the session ahead. I wish you all the best of days to come and good luck with your trading! Stay safe out there.