Fed Forecast: Bond Buying To End Early, as Increased Inflation Outlook Leads to Multiple Rate Hikes in 2022
The Federal Reserve addressed increasing inflation on Dec. 15, saying it would end its bond buying program earlier than planned and hike rates several times in 2022, as “supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation.”
The Fed said on Dec. 16 that it had decided to reduce the monthly pace of its net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities. “The Committee judges those similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook,” according to a statement.
Jay Hatfield, CEO at Infrastructure Capital Management, told GOBankingRates that “the Fed’s announcement of a $30 billion dollar taper and expected federal funds of .75% in 2022, 1.60% in 2023 and 2.5% in 2024 were almost exactly where Fed Fund futures were priced prior to the announcement.”
“Stocks are rallying as investors feared a more hawkish Fed after explosive CPI and PPI prints,” Hatfield added.
“We understand that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation,” Powell said in a press conference on Dec. 15, according to a transcript of his speech. “We are committed to our price stability goal. We will use our tools both to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched. We will be watching carefully to see whether the economy is evolving in line with expectations.”
The Fed also increased its inflation outlook for 2021 to 5.3% from its 4.2% projection in September, according to the Fed’s projections. As for unemployment, the projections decreased to 4.3%, from 4.8% in September.
“The median of FOMC (Federal Open Market Committee) dot plot revisions now point to three rate increases in both 2022 and 2023, as well as one more in 2024,” Sam Stovall, chief investment strategist at CFRA Research, wrote in a note sent to GOBankingRates.
“After the release of the meeting minutes, equity prices turned from red to green, likely because the uncertainty had been lifted and Fed Chair Powell didn’t sound as hawkish as many had feared,” Stovall wrote.
“In addition, history says, but does not guarantee, that prior Fed tightenings resulted in minor price increases for the equity market over the ensuing year. Since 1946, the Fed started 17 rate-tightening cycles; 13 of these consisted of three or more rate increases, with nine of them occurring within a 12-month period. From the date of the first rate hike until the third, the S&P 500 rose an average of nearly 3% and gained in price 56% of the time.”
Powell also said that economic activity is on track to expand at a robust pace this year, reflecting progress on vaccinations and the reopening of the economy, but “the rise in COVID cases in recent weeks, along with the emergence of the Omicron variant, pose risks to the outlook.”
Notwithstanding the effects of the virus and supply constraints, FOMC participants continue to foresee rapid growth. In the summary of Economic Projections, the median projection for real GDP growth stands at 5.5% this year and 4% next year.
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