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Fed: 3 things to expect from the FOMC statement today

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Yahoo Finance Live's Brian Cheung discusses the Fed balance sheet, inflation, and what to expect from today's FOMC meeting.

Video Transcript

- Let's bring in our Brian Cheung because we keep alluding to the Fed or at least I keep alluding to the Fed. Here he is. Brian Cheung talking about what we could hear from the Federal Reserve today.

We know there's not going to be any change in rates today. Really we're looking to the language to try and figure out what's happening next. I mean, is there even a chance today that we start to already get some balance sheet roll off? Or is it too early? It's

BRIAN CHEUNG: Probably too early for that and it's also too early for interest rate hikes. And that's because the Fed wants to make sure they clearly communicate to markets exactly what they should be expecting as they do eventually tighten policy later this year. But again, that meeting expected later this afternoon in terms of the announcement.

So let's take our three big takeaways, if you will, I'll call them our FOMC3 our Federal Open Market Committee, three, questions that I've got. And the first is 3, 4, 5, how many rate hikes are we going to get this year? Do you get it, the little boot for hiking boots?

Anyway the point is that a lot of people on the street are guessing are we going to get four interest rate hikes this year? Are we going to get perhaps less or more than that? And even though we're not going to get a new set of economic projections from the FOMC in this meeting kind of showing where interest rates could go over the next few years, what we will get as a press conference from the Fed chairman at 2:30 where he could either add some kind of credence or throw a little bit of water on the calls that we're seeing on Wall Street for more or less aggressive rate hikes over the course of 2022, certainly something to watch.

But the number two question that I have in my FOMC3 concerns the Federal Reserve's balance sheet. When will the balance sheet run off? You get it? The person running the idea right now is that the Federal Reserve has a $9 trillion balance sheet and right now they're in the process of bringing any asset purchases that have been further expanding that balance sheet to a full stop. They plan on having that done by MID-March.

But the question is going to be at what point down the line do they then start actively allowing its balance sheet to shrink, instead of going up starting to come back down? While some of those on the street are saying that could happen sometime in the summer, perhaps in July or maybe around the Federal Reserve's August Jackson Hole Conference. Now, if the Fed does follow through on that later this year, keep in mind contracting the balance sheet would actually give the Fed a little bit more flexibility to raise interest rates less to quell inflation and that's because of the effect of higher-term, longer-term rates.

But my number one question is really all encompassing those first two points that I had, my number one FOMC3 question is simply when does inflation go down? And that's because the Federal Reserve has message very clearly we should continue to expect to see eye-popping readings on year over year inflation in both the consumer price index and the PCE index, the other reading of inflation. Now depending on how fast or slow those inflationary numbers start to come down and eventually what they come down to is going to be very important for the Fed and how aggressively they want to start tightening policy through balance sheet runoff and eventually raising interest rates. That's going to be commentary we'll get from the Fed chairman at 2:30 which of course we'll have the full coverage of right here on Yahoo Finance.

- Brian, a very busy day for you I'm sure. You know, I've seen some or I've just heard some chatter this week on the street a lot of folks starting to say that it is a good thing the Fed is raising rates because it signals the economy is in a good place. But is that the right read because we continue to get a lot of reads to suggest that the US economy and global economy are decelerating?

BRIAN CHEUNG: Yeah, I mean, that's underscored by the conversation that we had yesterday with the IMF, which actually downgraded expectations for US growth this year. But on the other hand, everyone that you talked to, most economists would say, well, of course you're going to get a slowdown in the economic pace of recovery. And simply that's because of the rapid bounce back that we got over the later parts of 2020, 2021, and now 2022. So of course you're going to see a bit of a downshift from the very large quarterly GDP numbers that we had gotten. And keep in mind, we're going to get another print on Q4 GDP not long from now.

But of course, the question for the Fed is going to be this Goldilocks situation where you're tightening your policies into economy that's going to recover and continue to recover but not at a speed that would abruptly end that recovery. And I think that when you take a look at the shape of the yield curve, you are seeing a little bit of doubt on behalf of financial conditions that the Federal Reserve can rapidly raise interest rates without triggering an abrupt end to this recovery.

Now, the Federal Reserve for their part has insisted, well, even after we raise interest rates and even when we start to let the balance sheet shrink by and large that could still be below the natural pace that the economy can stand in terms of higher interest rates where actually it will continue to be accommodative even if the federal funds rate is 50, 75, 100, 125 basis points higher than it is right now.

But of course, the Fed might prefer a steeper yield curve to be hiking rates into. That would allow the Fed to kind of get a little bit more of a metering stick on the economy to say actually things are in that Goldilocks position where it's not too much or too little for you to start raising rates.

- All right, Brian Cheung. It's a tough needle to thread if you will. Appreciate.