Fed Research: Say farewell to team transitory, tightening sooner and faster

Danske Research Team Danske Bank A/S

Key takeaways

We are changing our Fed call based on Fed Chair Powell's comments today and yesterday, which were definitely strong hawkish signals. Powell argues that COVID-19 outbreaks are inflationary, that it is time to "retire" the word transitory and that the Fed can consider ending QE bond buying "a few months" earlier.
We now expect the Fed to increase the tapering pace from USD15bn per month to USD25bn so that the tapering is concluded in April (from June previously). We have been arguing that risks were skewed towards a faster tapering pace.
We now expect three 25bp rate hikes in 2022 in June, September and December. By ending QE bond buying in April, the door is open for the first rate hike in May. We still expect four rate hikes in 2023.
If the Fed increase the tapering pace to USD30bn, it would be a strong signal, in our view, that the first rate hike may arrive as early as in March, as the Fed has made it clear that it would like to end QE bond buying before hiking interest rates.

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Author

Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

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