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FOMC Preview: Liftoff

by Calculated Risk on 3/13/2022 10:11:00 AM

Expectations are the FOMC will announce a 25bps rate hike at the meeting this week. In addition, the FOMC will hint at balance sheet reduction (runoff of assets / not reinvesting) and indicate further rate hikes at upcoming meetings.

The invasion of Ukraine will probably keep a 50bps rate hike off the table for now (the war is leading to a surge in prices, but the Fed cannot stop the war or end the pandemic with monetary policy).

From Merrill Lynch:

“We expect the Fed to kick off the rate hiking cycle at the March FOMC
meeting with a 25bp increase in the fed funds target range to 0.25-0.50%. In addition,
the Fed is likely to release an addendum to their “Principles for Reducing the Size of the
Federal Reserve’s Balance Sheet”, with specifics on caps for the unwinding of their
holdings of Treasuries and agency securities. This will provide a strong signal that the
Fed is ready to commence Quantitative Tightening (QT) as early as the following
meeting in May …These actions would be in line with Chair Powell’s messaging at the
semi-annual monetary policy testimony in early March, in which he explicitly stated that
he would propose and support a 25bp hike and that he expects the Committee to set the
pace of balance sheet runoff at the next meeting.”
emphasis added
Projections will be released at this meeting. Here are the December projections. In December, most participants expected 3 rate hikes in 2022, and now many analysts expect 7 rate hikes this year. A huge change!

From Goldman last month:

“We are raising our Fed forecast to include seven consecutive 25bp rate hikes at each of the remaining FOMC meetings in 2022 (vs. five hikes in 2022 previously).”

And from Merrill:

“Inflation is here and it continues to make its presence known everywhere. We remain comfortable with our hawkish call for the Fed to hike seven times this year.”

Wall Street forecasts are for GDP to barely increase in Q1 2022, and to be in the 2% to 3% range for 2022. This is a sharp reduction in Wall Street growth forecasts, and the FOMC will probably lower their 2022 forecast down to 3% or so.

GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1Projection Date202220232024Dec 20213.6 to 4.52.0 to 2.51.8 to 2.0

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 3.8% in February. There will likely be a slight reduction in the unemployment rate forecast for Q4 2022.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2Projection Date202220232024Dec 20213.4 to 3.73.2 to 3.63.2 to 3.7

2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of January 2022, PCE inflation was up 6.1% from January 2021. It seems like the FOMC will revise up their inflation projections for 2022.

From Greg Ip at the WSJ: War in Ukraine Fans the Flames of Global Inflation

“From the Russian Revolution to Vietnam, war has been a reliable precursor to inflation. History may be about to repeat as Russia’s invasion of Ukraine tilts the balance of global political and economic forces toward higher inflation.”
Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1Projection Date202220232024Dec 20212.2 to 3.02.1 to 2.52.0 to 2.2

PCE core inflation was up 5.2% in January year-over-year.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1Projection Date202220232024Dec 20212.5 to 3.02.1 to 2.42.0 to 2.2

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