Fed update: Quickly back to neutral by front-loading rate hikes

Danske Research Team Danske Bank A/S

Key takeaways

Recent Fed speeches and interviews have been to the hawkish side suggesting the Fed is about to front-load rate hikes in order to ease high underlying inflation pressure by raising the target range quickly back to neutral.
We change our Fed call accordingly, as we have argued for a long time that the Fed is behind the curve and it seems like the Fed has come to the same conclusion.
We now expect the Fed to deliver 50bp rate hikes in May, June and July. We expect the Fed to hike by 25bp at each of the following meetings, implying a Fed funds rate of 2.50-2.75% by year-end.
Risk is still skewed towards faster rate hikes and we cannot rule out a larger 75bp rate hike at some point or that the Fed continues hiking by 50bp for longer.
Inflation is higher and the labour market tighter than when the Fed hiked by 50bp in 2000 and 75bp in 1994, respectively.
Recent Fed comments: No one is ruling out 50bp rate hikes

Despite the 25bp rate hike at the March meeting, we are still of the view that the Fed is behind the curve. After the March meeting, the rhetoric has been more hawkish, focusing on hiking the Fed funds target range to neutral territory faster. In Fed Chair Jerome Powell’s speech on Monday, he opened the door for raising rates at a faster pace: “if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so”. Powell added that ”There is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level, and then to move to more restrictive levels if that is what is required to restore price stability”.

Several other FOMC members have expressed their views since the March meeting and so far none has ruled out 50bp rate hikes and most are arguing that monetary policy should get back to neutral. The Fed’s longer-run dot is 2.25-2.50%. We have included an overview of the most important Fed quotes on page 6.

St Louis Fed President James Bullard remains the most hawkish member of the FOMC arguing that the Fed should raise the Fed funds rate to above 3% by year-end, which is the highest ‘dot’ among all the FOMC members. He argues that the Committee successfully adjusted policy rates in this manner in 1994. We discuss the large rate hikes in November 1994 (75bp) and in May 2000 (50bp) in further details in our case study on page 3.

Fed governor Christopher Waller said “I really favor front-loading our rate hikes”. He added that data ahead of the March meeting were screaming for a 50bp rate hike but the geopolitical situation led him to support 25bp. Cleveland Fed President Loretta Mester also argued for front-loading rate hikes. Richmond Fed President Tom Barkin says the Fed could move faster if needed to tame inflation. NY Fed President John Williams did not comment specifically on the May meeting but said the Fed would hike by 50bp if needed.

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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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