The Day at a Glance | February 18 2022

The Top

*Mester backs a faster cycle of increasing rates in case its necessary to contain inflation.

*Russia and the United States confirmed that they will continue to have diplomatic conversations next week to negotiate issues with Ukraine.

*Markets now consider that a 50bp increase on behalf of the FED will occur with less than a 40% degree of probability.

*IMF considers that inflationary pressures and slow growth at a global level will persist until 2023.

*ECB must not overreact in light of inflation, as this is a short term issue: Philip Lane, ECB Chief Economist

*Inflation in Japan became more moderate by logging a 0.5% annual rate in January and gave the BoJ enough room to maintain its expansive monetary stance.

*Janet Yellen proposed creating a fund in the World Bank to face future pandemics.

Economic environment

Increase in rates. Loretta Mester, of the Cleveland FED, has been the most recent member of the FED to back decisive action on behalf of the central bank in case inflation remains high. Mester backed the start of increasing rates to occur in March and gradual increases to follow in the succeeding months. If inflation has not slowed down halfway through the year, Mester proposed speeding up the process of increasing rates in the second half of 2022. Mester`s comments are in line with the FED`s most recent meeting minutes, in which the central bank assured that the start of the normalization of rates process will occur soon – the size of the increases will depend on data. As for reducing the bank`s balance sheet, Mester considers that it`s possible to carry out anticipated sales of mortgage backed bonds during the process in order for the FED portfolio`s composition to essentially return to being made up of T-bonds and decrease the distortions that the FED has caused in assigning credit within the economy. Mester`s comments back expectations of seeing an imminent process of monetary normalization. At the moment, markets have taken back their expectations of seeing an aggressive 50bp increase in the federal funds rate in March, which could be related to the risk aversion caused by geopolitical tensions in Ukraine and the FED`s lack of direct signs that could hint at such a large increase being necessary. Now, the most likely scenario is a 25bp increase in March, but the cycle of increasing rates will continue through at least the first half of 2022.