Fed to lift rates in Q3 2022, but risk it comes sooner – Reuters Poll

“The US Federal Reserve will raise rates in the third quarter of next year, earlier than expected a month ago, according to economists in a Reuters poll who mostly said the risk was that a hike comes even sooner,” said Reuters during the early Asian session on Thursday.

The survey of economists cites persistently higher inflation to mark the shift in expectations for lift-off to Q3 from Q4 next year. Even so, “Rising COVID-19 cases around the world and the emergence of the Omicron coronavirus variant, along with renewed restrictions in some countries underscore that the pandemic is not yet over,” said the Reuters poll.

Key quotes

The Dec. 3-8 poll predicted the Fed would raise rates by 25 basis points to 0.25-0.50% in Q3 2022, followed by three more hikes - in Q4 next year and Q1 and Q2 of 2023. The fed funds rate was expected to reach 1.25-1.50% by end-2023.

The timing shift to the third quarter of next year was also underpinned by Fed Chair Jerome Powell saying the central bank would discuss in December whether to end its $120 billion in monthly bond purchases a few months sooner than anticipated. Previous expectations were for it to end in mid-2022.

More than 60% of respondents to an additional question, 22 of 35, said the program would end by March. More than 80% of respondents, 30 of 36, said the risk to the timing of the first hike in this cycle was that it comes earlier.

Sixteen said a hike could come in the second quarter of 2022 and five said it could come as early as next quarter. Just a month ago only five economists said the Fed should hike in Q2 next year and four said Q1.

Economists were split on the biggest downside risk to the U.S. economy next year with 18 of 36 saying new coronavirus variants and 15 choosing high inflation.

Market implications

The poll results hint at the firmer US Treasury yields and the US dollar ahead of Friday’s US Consumer Price Index (CPI). The same could also be cited as the catalysts to challenge AUD/USD bulls of late.

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