La Française: Pre-FED commentary

La Française: Pre-FED commentary

14 december 2021

Fed
Federal Reserve.jpg

By François Rimeu, Senior Strategist, La Française AM

At the Federal Reserve’s next policy meeting on December 14-15, we expect the FOMC will announce an accelerated reduction in the pace of asset purchases introduced at the November meeting after strong economic growth (labor supply, spending growth) and heightened inflationary pressure.

Please find below what we expect:

  • The Federal Reserve System (FED) to announce that they will double the pace of tapering to $30bn per month beginning in mid-January 2022 (i.e., they previously announced $15bn). This would mean that Quantitative Easing would end in March 2022 (instead of June 2022 previously).
  • Consequently, on policy rates, the dots plot will show earlier rate hikes: two hikes next year (0.625%) and five more hikes through 2024 (three in 2023 to 1.375 % and two hikes in 2024 to 1.875%). The longer-run fed funds will be unchanged at 2.5%.
  • The policy statement will reflect these hawkish changes. According to Chair Powell’s recent remarks, the FED will stop characterizing higher inflation as “transitory”. Nevertheless, Chair Powell will continue to outline that price pressures should ease into next year. He will also emphasize that the risk of persistently high inflation could threaten the longevity of economic expansion and therefore also pose a risk to the employment side of the Federal Open Market Committee’s dual mandate. We also expect Chair Powell to underline that future monetary decisions will depend on macro-economic data.
  • We expect the SEP (Summary of Economic Projections) to indicate lower growth in 2021 (from 5.9% to 5.5%) but higher GDP growth in 2022 (from 3.8% to 3.9%) and unchanged growth for 2023 and 2024 (respectively 2.5% et 2.0%). 
  • We expect the committee will revise its forecast for higher Personal Consumption Expenditures (PCE) inflation figures with projections moving up from 4.2% to 5.3% in 2021, from 2.2% to 2.4% in 2022 and unchanged in 2023 and in 2024, respectively 2.2% and 2.1%. 

To summarize, we expect that Chair Powell will prepare investors for interest rates hikes in 2022 if inflation remains elevated. We expect him to highlight that the FED policy will continue to be flexible and that the timing of interest rate increases will be data dependant. There is very little room for policy mistakes here with traders already weighing the potential impacts of less generous monetary settings. We expect high volatility but, in the end, a “prudent” FOMC outcome stressing the high degree of uncertainty.

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