New Delhi, Dec 16 : The December meeting of the Federal Open Market Committee (FOMC) of the US Federal Reserve confirmed a hawkish policy pivot, announcing a doubling of the pace of the taper to $30 billion per month, setting asset purchases on course to end in mid-March, according to a report by Morgan Stanley.
At the same time, the FOMC statement effectively checked off the inflation side of the liftoff test in the forward guidance, such that now the timing of liftoff depends only on labour market conditions.
The FOMC’s Summary of Economic Projections (SEP) correspondingly saw large-scale changes, with the median policymaker now projecting that inflation remains even more elevated next year, and remains above two percent over the entirety of the forecast horizon.
Alongside that, the median policymaker now projects three 25bp rate hikes next year, followed by three additional 25bp hikes in 2023and two 25bp hikes in 2024.
And importantly, with respect to the timing of liftoff, every single policymaker now sees at least one hike next year, the report said.
That sea change in views among the FOMC is impressive given that just three months ago nearly half the Committee didn’t see rates lifting off until 2023, and even more impressive compared to earlier this year when most policymakers didn’t have lift off until sometime after 2023.
This somewhat dramatic evolution has reflected a continual adaptation to the data – as inflation has proved to run higher for longer,and as labour market conditions continued to strengthen “rapidly”, to use Fed Chairman Jerome Powell’s word, policymakers have had to reconsider the path for policy, Morgan Stanley said.Powell described those evolutions in policy views can also occur rapidly and went to lengths to describe how just over the month of November,a hot 3Q reading on the employment cost index (ECI), followed by a strong payrolls report,and rounded out by another elevated CPI reading led to a quick consideration among policymakers that it would be appropriate to speed up the taper, and as evidenced in the dots, also to pull forward the timing of liftoff.
The speedier taper concludes in mid-March, providing optionality for the Fed to begin hiking soon after the taper ends “should conditions warrant”.That decision will be taken “in coming meetings”, which puts June in play, one quarter earlier than our call for 3Q22 liftoff, the report said.Inflation has run higher for longer and labour market conditions continued to strengthen “rapidly”, leading to a marked hawkish shift in the dots showing a median 3 hikes in 2022.san/ksk/
US Fed projects 3 rate hikes in 2022
This remarkable shift in FOMC views is significant considering that three months ago, nearly half of the Committee did not see rates rising until 2023.It’s even better than earlier this year, when many policymakers believed they would have to lift rates after 2023.Morgan Stanley stated that this dramatic change has been due to a continuous adaptation to data.
As inflation continued to rise for longer and as the labour market strengthened “rapidly”, Fed Chairman Jerome Powell said, policymakers had to rethink their policy. Powell explained that rapid changes in policy opinions can occur and went on to explain how, just over the month, a hot reading of the 3Q employment cost index, followed by strong payrolls reports, led to policymakers quickly considering whether it was appropriate to accelerate the taper and, as shown in the dots in the graphs, to push forward the time of liftoff.
Mid-March sees the Fed’s faster taper end, giving the Fed the option to hike soon “should the conditions warrant”.The report stated that the Fed will make this decision “in future meetings”, which means June is in play.
This puts June one quarter ahead of our 3Q22 call for liftoff.
The inflation rate has been higher over time and the labour market continues to improve “rapidly”, leading a marked shift to the dots, with a median of 3 increases in 2022.
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