Brace for a more aggressive Fed
|Summary
The FOMC made it crystal clear yesterday that rate hikes are imminent, and ChairPowell embraced a hawkish tone in his post-meeting press conference. In that regard, Powell left open the possibility of sequential rate hikes.
We now think it is likely that the Committee will hike rates by 25 bps at the March 16, May 4 and June 15 policy meetings. Previously, we had anticipated that the FOMC would pause in May.
Along with 25 bp rate hikes in September and December, we now forecast that the FMC will raise its target range for the federal funds rate by 125 bps over the course of 2022. We continue to look for 75 bps more of additional rate hikes next year.
The Committee is still discussing the steps it will take to reduce the size of the Fed balance sheet. But we think it is likely that it will pull forward balance sheet reduction relative to what we had previously anticipated. Specifically, we look for the Committee to announce balance sheet run off at the July meeting. Previously, we had expected the announcement to be made in September.
Powell noted that the economy is in a much different place today than when the last tightening cycle commenced in December 2015. Consequently, a more rapid pace of monetary tightening relative to the last cycle seems to be appropriate today.
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