Wednesday, January 26

Fed is seen delivering one of the most aggressive pivots in years

This week, Federal Reserve officials will accelerate the settlement of bond purchases and signal interest rates to take off in 2022, economists surveyed by Bloomberg said, announcing a historic policy shift to counter the fastest inflation since the 1980s.

More than half predict that the Fed’s quarterly forecasts, released after the conclusion of its two-day meeting on Wednesday, will show the median of 18 officials projecting two rate hikes next year from current levels near zero.

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That’s a change from predictions in September, when policymakers were evenly split between takeoff in 2022 or 2023. The survey of 49 economists was conducted from December 3-8.

“It’s going to be the biggest sea change in the history of the dot plot,” said Laura Rosner-Warburton, senior economist at Macropolicy Perspectives, referring to the Fed’s rate forecasts that have been released since 2012.

President Jerome Powell told lawmakers on November 30 that it would be appropriate to consider accelerating the reduction to end a few months before the originally planned conclusion in mid-2022.

Diminishing perspective

“The downsizing process has become a straitjacket, preventing the Fed from responding to the higher than expected level and persistent inflation,” said Philip Marey, senior US strategist at Rabobank, in a response to the survey. “Therefore, it is likely that they will double the pace of the reduction to create the option of raising as early as March.”

Bets on the interest rate futures markets show around 66 basis points of adjustment by the end of next year.

More than half of economists expect the Federal Open Market Committee that sets policy to double the rate of reduction to $ 30 billion per month, beginning in January and ending in March.

What Bloomberg Economics Says

“The committee is expected to accelerate the pace of reducing its bond purchases; Bloomberg Economics expects it to double the pace, stopping net purchases in March. The key question will be the rationale the committee provides for making the adjustment. A logical step would be to base the move on recent news about the labor market and inflation. ”

– David Wilcox, US Economic Research Director

Policymakers are expected to include two rate hikes in 2022, forecast three moves in 2023 and two more in 2024, with rates reaching 1.9% that year. That represents a somewhat steeper rate path than the FOMC projected in September. The trajectory coincides with the predictions of economists, who see rates that will reach 2% in 2024.

Powell pivot

Powell’s turn to a more aggressive outlook on downsizing has been driven by rising inflation. Since the Fed’s November 2-3 meeting, data has shown that consumer prices rose 6.2% in October and 6.8% in November, the fastest rate since 1982.

Nearly half of the economists surveyed said the surge, concerns about inflation in the White House and the appointment of Powell as Fed chairman have contributed to the tightening stance.

“The forecast will show an increase in inflation, a drop in unemployment and a massive shift in rate hikes through 2022,” said Diane Swonk, chief economist at Grant Thornton LLP. “This will mark the first time since the 1980s that the Fed really admits that it is chasing rather than anticipating what was sometimes non-existent inflation. That is a major break with the past. ”

The FOMC is likely to see inflation persist, raising its forecasts for headline inflation for 2022 to 2.5%, according to the survey. Policy makers are also expected to show unemployment to fall to 3.7% by the end of 2022, which would be below their long-term forecasts of 4%.

Economists expect the Fed to keep the language in its policy statement that it does not plan to raise interest rates until the United States reaches “maximum employment” and inflation hits 2% and is on track to exceed 2% during some time.

Almost all economists, however, expect the FOMC to modify or delete its phrase that inflation largely reflects factors “expected to be transitory,” after Powell told Congress that it is time to withdraw the word. ” transient”.

Omicronic impact

Most Fed officials have said it is too early to determine the economic effect of the new omicron variant of Covid-19. About two-thirds of economists say the FOMC is likely to see the tension modestly slow US growth, but it has the potential to boost prices.

“There are significant uncertainties presented by omicron, which could weigh on growth and job creation, while having a more mixed influence on inflation,” said James Knightley, chief international economist at ING Financial Markets LLC. While he expects two rate increases in 2022, “if the scientific evidence suggests that we are not entering a darker period for the pandemic, we imagine that three increases are much more likely.”

Economists view risks to monetary policy, in terms of inflation, as sloping upward, while risks to growth are sloping downward or roughly balanced.

Vice President of Supervision

President Joe Biden reappointed Powell and appointed Lael Brainard as vice president, but he still has three other seats to fill on the Fed’s board, including a new vice president of supervision, responsible for setting the agenda for regulations of the big banks of the United States. Wall Street.

Economists were divided on who will get the nod, with 34% waiting for Richard Cordray, former director of the Consumer Financial Protection Bureau, followed by former Fed Governor Sarah Bloom Raskin with 25%, and Raphael Bostic. , president of the Atlanta Fed, with 19%.

“The White House wants Cordray,” said Chris Low, chief economist at FHN Financial. “If they think they can’t get the necessary votes, President Biden will nominate Bloom Raskin.” Bostic lacks supervisory experience, but “could get the go-ahead for one of the empty board seats.”

© 2021 Bloomberg

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