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Fed Doubles Pace Of Taper, Now Expects Three Rate Hikes In 2022

Tyler Durden's Photo
by Tyler Durden
Wednesday, Dec 15, 2021 - 08:05 PM

Tl;dr...

  • The Fed statement and economic projections saw the central bank double the pace of its asset purchase tapering to USD 30bln per month (consisting of USD 20bln Treasuries, USD 10bln MBS – this will be doubled again in January, with similar reductions likely be appropriate each month thereafter), which puts it on course to conclude asset purchases by March, from the prior landing zone of around June, although this could be adjusted if warranted.

  • Its updated projections now see three rate hikes in 2022, revising up its view from one hike pencilled in at the September FOMC (recall that September, the Committee was essentially split on the potential need for a second 2022 rate hike); longer-term, it has left its terminal rate view unchanged, however.

  • Inflation forecasts were revised up to 2.6% for headline PCE by the end of next year (prev. 2.2%), while the core measure is seen at 2.7% by end 2022 (prev. 2.3%).

  • On the labour market, the Fed sees the jobless rate return to the 3.5% mark next year (prev. saw 3.8%), where it is likely to stay over its forecast horizon.

The bottom line is that this was largely in line with what the market was expecting (accelerating taper, raising inflation forecasts, seeing continual progress in the labour market), where the Fed sees the economy continuing to grow (its growth view for next year was revised up, although 2023’s pace was revised down a touch).

As Brian Coulton, chief economist at Fitch Ratings, notes:

“This is a major pivot from the Fed, prompted by clearer evidence that inflation is broadening...

...Most significantly, inflation is described as having already exceeded 2 per cent ‘for some time’, so it looks like the Fed feels enough progress has now been made in compensating for earlier shortfalls in inflation.”

As the dust settles, money markets now see a 90% chance of an April rate hike.

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Since the last FOMC statement on Nov 3rd, where Jay Powell 'reportedly' unveiled a 'Dovish Taper' - only to unleash the Powell Pivot a few weeks later - bonds and the dollar are higher, gold is unchanged, and stocks are lower...

Source: Bloomberg

Real Yields have surged higher since the Powell Pivot (5Y real yields are the least negative since early Dec 2020)...

Source: Bloomberg

But, since the 'Powell Pivot', the STIR market shifted dramatically more hawkish, now pricing in at least one full rate-hike before June 2022...

Source: Bloomberg

Which is dramatically more hawkish than the 'current' dots assumed by The Fed...

Source: Bloomberg

What is even more notable is that the market is pricing in an end to the tightening cycle in 2024 (as the 12th-16th ED future has now inverted)...

Source: Bloomberg

Expectations are hawkish and as follows:

  1. Turbocharge the taper bringing monthly bond buys to $75bln ($25bln cut instead of planned $15bln). This is very consensus; a $20bln cut would be seen dovish.

  2. Dot plot to include higher 2022 core PCE forecast (median 2.4%, up from 2.2%)

  3. Dot plot to include 15 of 18 forecasts with liftoff in 2022, creating narrow median of 2 rate hikes.

  4. Powell to re-emphasize need for "policy flexibility" as the reason before accelerating the taper.

  5. Powell to push back on need for immediate rate hikes, *emphasizing that the test for hiking is much stricter than the test for tapering.

  6. Powell to emphasize that while inflation risks have risen, Fed is still waiting to look through economic bottlenecks before making a decision.

So, just how will The Fed adjust to its new hawkish stance and will it entirely fold to the market's demands?

  • The Fed doubled the pace of the taper to $30 billion per month

  • The Fed blames elevated inflation on "supply/demand imbalances"

  • And the Dot Plot shifted dramatically, showing The Fed expects 3 hikes in 2022 and 3 more in 2023.

That is in line with market expectations...

That is a dramatically more hawkish shift from the previous dots... 10 of the 18 were looking for three hikes in 2022 and two were looking for four hikes.

The Fed also lowere d its unemployment forecast but raised its inflation forecast dramatically in the SEPs...

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Read the full redline below:

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