Expectations that the US Federal Reserve will start raising interest rates in March, a marginal call just a few weeks ago, are skyrocketing in the wake of a drop in the US unemployment rate. signs that central bankers are eager to roll back record political stimulus to tackle historically high inflation.
“It is difficult to avoid the conclusion that the labor market is very tight. We believe Fed officials are coming to the same conclusion, and that it may be difficult to delay the first hike until June, our previous call, ”Michael Feroli, JPMorgan Chase & Co’s chief US economist, wrote in a note. Friday.
“We now see a takeoff in March, followed by a quarterly pace of increases thereafter.”
Economists at Deutsche Bank AG and Citigroup Inc updated their forecasts with the exact same call for 2022 in the wake of a report on Friday that showed the unemployment rate fell to 3.9% in December.
That was the lowest since before the pandemic, and compares with a Fed projection for the end of 2022 of 3.5%.
“The Fed will be very nimble in responding to incoming data, making possible consecutive rate hikes or even larger increases,” Deutsche Bank economists, including former Fed official Peter Hooper, wrote in a note.
Just three weeks ago, almost all forecasters had predicted that the Fed would wait until at least the second quarter before raising rates. Among the minority, Barclays plc had switched to a March call in the wake of the November employment report, which had also shown an unexpectedly large drop in the unemployment rate.
The rapid change reflects conclusions that policymakers will not wait to increase borrowing costs until payrolls return to their pre-pandemic levels. Job listings remain more than 3 million fewer than in February 2020.
Yields go up
While not his base-case forecast, Krishna Guha, head of central bank strategy at Evercore ISI, raised on Friday the possibility that the Fed might decide at its January 25-26 meeting to bring forward the end of its buyout program. bond. It is now scheduled to conclude in mid-March.
The Treasury bond market had begun to turn even before the release Wednesday of the minutes of the Federal Open Market Committee meeting in mid-December, showing that some officials believed that the policy makers’ goal of achieving full employment before the first rate hike had already been achieved. Yields began to rise on Monday and continued to advance throughout the week.
Ten-year yields broke their 2021 highs on Friday to reach levels not seen since the pandemic hit, and were at 1.76% as of 4:38 p.m. in New York.
Interest rate futures are now priced at about a 78% chance of a March Fed rate hike.
Markets may need to tighten further, according to former Federal Reserve Bank of New York chairman William Dudley.
“I don’t think the market still thinks the Fed is going to be really aggressive,” Dudley said in an interview with Bloomberg Television.
The continued spread of the omicron variant has not prevented the radical shift in expectations.
For his part, St. Louis Federal Reserve Bank Chairman James Bullard, a voter of this year’s rates, suggested Thursday that he didn’t see much risk from omicron, noting that confirmed cases in South Africa have reached their peak and they are falling and the United States can follow that pattern.
Meanwhile, San Francisco Fed Chair Mary Daly said Friday that she would be in favor of starting to downsize the central bank’s bond portfolio after just one or two rate hikes.
“I think we are at a time where we need to adjust policy,” said Daly, considered one of the more dovish Fed officials.
Economists are merging around the second half of the year for the Fed to begin to shrink the balance sheet. The Deutsche Bank team anticipates that it will start in the third quarter. Barclays on Friday advanced its call to the third quarter, from the fourth. Citigroup now sees it as of July.
With the help of Olivia Rockeman and Michael Sasso.
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