La Française: Pre-Fed commentary

La Française: Pre-Fed commentary

14 maart 2022

Fed
Federal Reserve Washington.png

By François Rimeu, Senior Strategist, La Française Asset Management

As widely expected, at the Federal Reserve’s next policy meeting, on March 15-16, the FOMC will start hiking with a quarter-point increase in interest rates to get prices under control. Geopolitical and economic risk should not change Chair Powell’s hawkish message.

Please find below what we expect:

  • The FOMC will raise the federal funds target range to 0.25-0.50% (25 bps increase), the first increase since 2018. Considering the risk of persistent high inflation and strong labor markets, Chair Powell is expected to signal more hikes to come with the possibility of 50 bp moves if needed, depending on the data. 
  • On the side of the “dot plot”, we expect the Committee to show a median of six hikes for 2022 (1.625%) and three additional hikes next year (2.375%). There is a chance that 2024 dots will show higher rates than the terminal rate (2.5%).
  • We do not expect change on the terminal rates (2.5%), but the question could come during the Q&A with the terminal rate potentially below 2024 dots.
  • On the summary of economic projections (SEP), we expect them to indicate lower growth in 2022 (from 4.0% to 3.7%) and in 2023 (from 2.2% to 2.1%). For 2024, we expect growth to stay close to the potential growth (1,8%).
  • We anticipate that the committee will revise its forecast for higher inflation figures with projections moving up from 2.6% to 4.0% in 2022 (This is the average Q4 2022 inflation, not the 2022 average) and from 2.3% to 2.5% in 2023. We expect median inflation expectations to remain at 2.1% for 2024.
  • On quantitative tightening (QT), we expect some details (on caps) on the balance sheet runoff as the reduction should begin after rate hikes are initiated.
  • The post-meeting statement will likely be amended to note that the implications of Russia’s invasion of Ukraine on the US economy of are highly uncertain.

All in all, the Fed’s hike will not come as a surprise for market participants. But we expect the global tone to stay hawkish, with some flattening on the US curve.

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