Powell’s ‘Different Expansion’ Spurs Faster Fed Hike Calls
Powell’s argument that the U.S. faces a 'different expansion' prompted predictions that Fed will raise interest rates even faster.
(Bloomberg) -- Federal Reserve Chair Jerome Powell’s argument that the U.S. faces a “different expansion” from when monetary policy was last tightened prompted some economists to predict the central bank will raise interest rates even faster than previously anticipated.
In reports published hours after Powell paved the way for the Fed to begin hiking rates in March, economists at Nomura Holdings Inc. said they now expected the central bank to lift its near zero benchmark by 50 basis points that month.
Their counterparts at BNP Paribas SA said they still reckoned the Fed will move in 25 basis point increments, but do so six times in 2022 instead of on four occasions. Deutsche Bank AG economists said they now see five increases this year.
“Chair Powell’s press conference was much more hawkish than expected as he repeatedly appeared to differentiate the upcoming hiking cycle from the last time the Fed normalized its policy rate at a roughly quarterly pace,” Nomura’s economists wrote in a report to clients. “Powell’s comments suggest the FOMC is beginning to coalesce around a more front-loaded policy rate response to elevated inflation, wages and inflation expectations.”
They predict the March 50 basis point hike, which would be the first such shift since May 2000, will be followed by three 25 basis point increases in May, June and July. They previously expected four 25 basis point increases over the course of the year.
Powell told reporters on Wednesday that policy makers are “aware that this is a very different expansion” and that “differences are likely to be reflected in the policy that we implement.”
He spoke of being “nimble” and moving “steadily,” whereas Fed officials spoke of being “gradual” when they last raised rates between 2015 and 2018.
“We read Fed Chair Powell’s comment that this cycle is different from the previous one as an indication that the Fed’s bias is for a steeper tightening than the markets and we had envisaged,” said the Luigi Speranza, BNP Paribas’s chief global economist.
While Goldman Sachs Group Inc. economists said they still predicted the Fed will increase rates four times, they acknowledged the risks to that call are “tilted to the upside.”
They too spotted Powell’s observation that the economy looked different than in 2015, while also noting his points that monetary policy would need to be able to address different outcomes and that the Fed would move “steadily.”
Even before this week, Bloomberg Economics had penciled in five rate hikes this year. Chief Economist Anna Wong repeated Wednesday there is an “upside risk for six.”
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