Fed, ECB Meetings Awaited As Investors Anticipate Policy Directions

Traders await a very big week witnessing major regular monetary policymaking meetings by both the US Federal Reserve and the European Central Bank to decide the direction of their future monetary policy.

Financial markets closely follow the upcoming outcomes of those two meetings, as they can turn out to be real game changers.

That is chiefly the case this time as both central banks are encountering a turning point, ready to switch from a highly accommodating policy with support and stimulus to a neutral approach to fight the rising inflation on sides of the Atlantic.

Maintaining balanced policy seems to be not easy amid the spread of the Omicron variant. The variant complicates matters by raising the risk of slowing down the US economic recovery from the pandemic recession.

Central bankers and policymakers may encounter a dual problem shortly, namely the hottest inflation data combined with slowing economic growth. That is a far more difficult problem to deal with rather than the problem of inflation alone, so central bankers must be extra cautious in crafting and conveying their messages to financial markets.

America’s GDP has slowed down from 6% in the second quarter to the 2% in the fourth quarter, as job growth has remained weak.
Messages By Fed So Far
There will be an, first of all, an announcement of tapering the asset-purchasing programme in the amount of USD 30 billion per month. Secondly, will follow a simultaneous upward revision to inflation and a downward revision to unemployment. That could signal the shift of the FOMC from a more dovish to a more hawkish direction.

The announcement of two 25 basis point hikes in short-term interest rates in 2022 and six more hikes through 2024. And eventually, rate hikes are to proceed cautiously, with the first rate hike that is expected in June, followed by probably seven other rate hikes in total by the end of 2023. That is certainly a lot of rate hikes for financial markets accustomed to near free money to digest.

Messages By the ECB So Far
The ECB is expected to be on the same page with the Fed and include three messages. The first message is that ECB will end net purchases under its pandemic emergency buying program in March 2022, and announce an expanded and more flexible asset-buying program.

Secondly, there will follow the announcement of the timing for the said decision.

It now looks more uncertain due to the emergence of the Omicron variant. At this point, the December 16 meeting could likely be looked upon as a can-hike exercise.

The ECB might decide to postpone at least part of the decision. That could pave the way to a less dovish stand of its policy tools than otherwise at a later stage. There could be surprises on either side of the Atlantic, setting financial markets up for another wild ride, given the current valuations.