Fed to Pivot to Fast Taper, More Rate Hikes: Decision-Day Guide
Federal Reserve policy makers are poised to accelerate their removal of monetary stimulus as a step toward the first interest-rate increases since 2018 as they pivot to restraining the hottest inflation in almost 40 years.
The Federal Open Market Committee is all but certain to hold its benchmark rate near zero after a two-day policy meeting Wednesday and is likely to double its pace of tapering of asset purchases only a month after the drawdown started, a removal of pandemic stimulus that sets the stage for higher rates later in 2022.
The panel will release a statement and forecasts, including the “dot plot” that includes central bankers’ projections on interest rates, at 2 p.m. in Washington. Chair Jerome Powell will brief reporters 30 minutes later.
‘’The Fed is ready to reset where they are on the inflation objective,” said Gus Faucher, chief economist with PNC Financial Services Group. “This requires a less dovish monetary policy. The policy in 2022 will still be expansionary but less dovish.”
The FOMC is likely to project two interest-rate hikes in 2022 and three in 2023, according to economists surveyed by Bloomberg. Only three months ago, the committee was evenly split between forecasting liftoff next year or 2023. It’s the biggest shift ever in the “dot plot” since the Fed began publishing it in 2012, according to Laura Rosner-Warburton of MacroPolicy Perspectives.
Investors are likely to be focused not only on the median forecast, but also on how many of the 18 Fed officials see three or more quarter-point hikes in 2022.
What Bloomberg Economics Says...
“In the wake of the highest CPI reading since 1982 and several signs of a tight labor market, the FOMC is likely to take a sharp hawkish turn, both in the tone of the post-meeting press conference and in statement and forecasts. Faster taper -- a doubling of the current pace -- is most likely baked in. What might be more surprising -- to the markets, not to us -- would be how fast and high the Fed now wants to hike rates.”
-- Anna Wong, Andrew Husby and Eliza Winger, economists
To read the full note, click here.
“They are in a significantly different place than they were just three months ago,” said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC. “The dot projections will be the most important thing. While the statement language can be vague, the dot projections offer something very quantitative and concrete that market participants can sink their teeth into.”
Forecasts for 2022 inflation are likely to be raised to about 2.5%, while the committee will probably see the unemployment rate falling to 3.7% by the end of next year.
The committee is expected to double the pace of tapering to $30 billion a month, starting in January and wrapping up in March. Powell told lawmakers on Nov. 30 it would be appropriate to consider speeding up the taper to end a few months earlier than the originally planned conclusion in mid-2022.
Wrapping up the asset-purchase program in the first quarter would give the FOMC the option to begin raising rates sooner than otherwise, as Fed officials have said they don’t want to be hiking while tapering is ongoing.
The FOMC is all but certain to remove the reference that it expects inflation to be “transitory,” following Powell’s comment to lawmakers in November that it’s time to retire the word. The description sparked confusion as it was interpreted to mean short-term in timing.
“They have to restore credibility,” said Aneta Markowska, chief U.S. financial economist at Jefferies LLC. “They get rid of transitory, which is long overdue. They still express an expectation that inflation will subside. It will just take longer.”
The Fed in its policy statements has linked interest-rate liftoff to meeting its 2% inflation goal and being on target to exceed that for some time, as well as achieving full employment. It’s unlikely the group will decide to adjust that guidance at this meeting.
But the committee may add a reference to the new omicron variant of Covid-19 as posing a downside risk to the economic outlook and increasing uncertainty over inflation, according to Morgan Stanley economists in a report.
Powell is likely to be pressed on the “dot plot” and may emphasize that the projections are made by individual participants and don’t represent a committee view. He could also highlight uncertainty about the outlook being heightened by omicron.
“The statement has been displaced by Powell’s opening remarks at the press conference” as a signal to policy, said Vincent Reinhart, chief economist with Mellon Investments and a former senior Fed economist. “He is going to walk away from the dots as much as he can.”
The interest-rate projections may be less of a signal than usual because President Joe Biden still has three nominations to make to the Fed board and two regional Fed banks are in the process of searching for new leaders, Reinhart said. The 2022 FOMC is likely to lean more dovish than the current committee once all the new participants are identified and installed in their new roles, he said.
Biden is expected to announce his picks for the three board seats “soon, and hopefully before the president and everyone leaves for time with their families over the holidays,” White House spokeswoman Jen Psaki said Monday.
While speeding up tapering won’t be a surprise, investors will parse what Powell says about the balance sheet after the taper ends, including whether there would be consideration of shrinking assets faster than in the past. That’s been recommended by St. Louis Fed President James Bullard, who was also an early advocate of a quicker taper.
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