The Fed doubles the pace of its buying cut and anticipates three rate hikes in 2022

The last 2021 meeting of the Federal Reserve Open Markets Committee (FOMC) did not leave anyone indifferent. The body in charge of dictating monetary policy in the United States announced on Wednesday its intention to accelerate the withdrawal of its stimuli in the face of the continuous onslaught of inflation. In this way, the central bank will double the pace of cutting its asset purchases, a process, commonly known as tapering, in an effort to gain enough room for maneuver to implement its first interest rate hike in the first half of the year. the next year.

Thus, the Fed will reduce its monthly purchases of Treasury bonds by $ 20 billion (from the 10 billion implemented since November) and by $ 10 billion (from $ 5 billion) its acquisition of mortgage-backed assets (MBS, for its acronym in English). With the official confirmation of both figures, the reduction in monthly purchases will happen from now on from 15,000 million to 30,000 million dollars. A path that, if maintained, would complete the withdrawal of these stimuli next March.

“In view of the evolution of inflation and the new improvement in the labor market, the Committee has decided to reduce the monthly rate of its purchases of net assets by 20,000 million dollars in the case of Treasury securities and in 10 billion dollars for mortgage-backed securities. Starting in January, the Committee will increase its holdings of Treasury securities by at least $ 40 billion a month and agency mortgage-backed securities by at least $ 20 billion a month, “the statement said.

This decision is supported by a readjustment in the institution’s inflation outlook. If the Fed and its president, Jerome Powell, insisted in previous caucuses that the pressure on prices was postulated as transitory, the FOMC closes 2021 with a script change. The entourage was accompanied by an update of the macroeconomic perspectives, as well as the one known as “dot-plot” (or dot plot), where senior central bank officials reflect where they see the price of money in the short, medium and long term .

With inflation hovering around highs not seen in nearly four decades in November, the Fed was forced to back down and raised its average outlook on personal consumption expenditure (PCE) prices to 5.3% this year and 2.6% the next one. In its underlying rate, there were also increases to 4.4% and 2.7%, respectively. Regarding the dot plot, the trend set by the median warns the market that a majority within the FOMC are already seeing at least three rate hikes of 25 basis points next year. At their September meeting, the last time these outlooks were updated, only one raise was telegraphed.

Inflationary pressures are more persistent and economic growth has started a logical slowdown

Under pressure from supply chain bottlenecks, the grassroots effects of economic reopening as well as many other factorsLike a languid workforce that has pushed wages up in the past year, the Fed is closing the year off in the most delicate economic climate we’ve seen in a long time.

While the central bank was nimble in March last year in lowering the price of money to 0 and 0.25%, where it currently remains, and initiating a new round of quantitative easing, see the purchase of assets worth 120,000 million of dollars a month until last November, to immunize the economy from Covid-19, the withdrawal can be somewhat tumultuous. Especially considering that inflationary pressures are more persistent and economic growth has started a logical slowdown after the expiration of fiscal stimuli. On the other hand, the new forecasts of the Fed do not observe the achievement of one of its mandates, full employment, until the end of next year.

Data, especially inflation data, and the reaction of financial markets to the first rate hike should be the dominant factor influencing monetary policy in 2022, but ultimately the FOMC members will be in charge. to make the right decisions. The rotation of regional Fed chairs Voting will make the political tilt a bit more aggressive next year.

The market estimates that the first rate hike could occur either at the May 4 or June 15 meeting

The presidency of the Boston Fed is open, which means that the designated alternate, Philadelphia Fed President Patrick Harker (a moderate hawk) will be able to vote at the beginning of the year. So will Esther George, from the Kansas City Fed and one of the iron fists when it comes to monetary policy. Along with her, Loretta Mester, another monetary hawk, at the head of the Cleveland Fed, will press to increase the price of money. Nor should we forget the three vacant seats on the Governing Council, which should be filled with relatively centrist candidates.

The futures on potential changes in monetary policy in the US, compiled by the CME FedWatch indicator, indicate that the market estimates that the first rate hike it could occur either at the May 4 meeting or at the June 15 meeting. Further, expectations suggest one more turn of the screw to the monetary crank of 25 basis points at the closing of the delegation on September 21 and another on December 14, taking rates to a range of 0.75% and 1 %.