by Calculated Risk on 5/01/2022 08:11:00 AM
Expectations are the FOMC will announce a 50bp rate increase in the federal funds rate at the meeting this week and probably also announce the “commencement of balance sheet runoff”.
On QT, the minutes of the March FOMC meeting detailed the plans for reducing the size of the balance sheet, indicating general agreement behind monthly caps of $60bn for Treasuries and $35bn for agency MBS phased in over three months or more. These finalized details clear the way for QT to be announced at this meeting, with starting monthly caps of $20bn for Treasuries and $10bn for agency MBS. Importantly, our US rates strategy team believes QT implementation will actually begin with a lag in June.”
From Goldman Sachs:
The key question is therefore what comes next. We forecast another 50bp hike in June followed by a deceleration to a 25bp/meeting pace of tightening for the rest of 2022, but see reasonably high chances that the FOMC will continue to hike in 50bp increments until reaching their median neutral rate estimate of 2.25-2.5%. We will therefore be paying close attention to any comments from Chair Powell at the press conference that suggest the FOMC intends to hike in 50bp increments beyond June.”
Wall Street forecasts are being revised down for 2022 due to the ongoing negative supply chain impacts from the pandemic (see China), and the war in Ukraine. For example, Goldman Sachs is now forecasting a 1.6% increase in real GDP, Q4-over-Q4 for 2022, well below the FOMC projections in March.
1 Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.
The unemployment rate was at 3.6% in March. The question is: Will the slowdown in economic growth push up the unemployment rate? Or will the rate continue to decline?
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.
As of March 2022, PCE inflation was up 6.6% from March 2021. This was a new cycle high. With the ongoing negative impacts on the supply chain, and on energy and food costs from the war, inflation might stay elevated longer than expected.
PCE core inflation was up 5.2% in March year-over-year. This was slightly below the February YoY increase, but it is too early to say the core inflation has peaked.