The Final Sprint (16 December 2021)
Doubling the pace of QE tapering
The Federal Reserve ended its final monetary policy meeting for the year with a bang. While holding interest rate unchanged at the target range of 0-0.25%, the central bank doubled the pace of quantitative easing (QE) tapering from the current $15 billion ($10 billion of Treasury securities + $5 billion of agency mortgage-backed securities) per month to $30 billion ($20 billion of Treasury securities + $10 billion of agency mortgage-backed securities) per month starting from January 2022.
The decision to speed up tapering comes as the central bank felt that “the economy no longer needs increasing amounts of policy support”, Fed Chairman Powell explained during the press conference. He also mentioned that the recent pace of inflation is “uncomfortably high” and employment in the U.S. is making substantial progress towards the central bank’s maximum employment goal. And so, the committee felt that the time has come to progressively withdraw from the policy enacted in response to the pandemic. Hence, in March 2022, the Fed’s massive bond buying programme will come to a complete halt, opening the way for interest rate hikes.
Dot plot indicates aggressive rate hikes for 2022
In the released quarterly projection materials, the dot plot shows a big shift in the dots upwards, indicating that more members are now expecting interest rate to be at a higher level for the next few years. Specifically, all 18 members of the committee expect at least one rate hike while 12 of them expect three rate hikes in 2022. Also, 11 members expected that interest rate will return to the pre-pandemic level of 1.5-1.75% in 2023, contrasting from the previous projection materials that only three members expect so. The sense of urgency for more rate hikes come as inflation has escalated to a near 40-year high level.
Persistent inflation
Ever since consumer prices set new highs in decades for two consecutive months, the Fed has changed its view that inflation is transitory. The central bank’s Chief is now acknowledging that inflation “may be more persistent” and is having an upward pressure on inflation expectations. It was also mentioned in the rate statement that supply and demand imbalances have led to “elevated levels of inflation”. Thus, the Fed has revised PCE inflation expectations upwards for 2022.
Moving forward, we can expect the Federal Reserve to wind up its QE during the first quarter of 2022 since good progress towards its dual mandate has been made – annual inflation has more than doubled the central bank’s target for several months and the rate towards maximum employment has been fast and is expected to continue in the near future.
The Federal Reserve ended its final monetary policy meeting for the year with a bang. While holding interest rate unchanged at the target range of 0-0.25%, the central bank doubled the pace of quantitative easing (QE) tapering from the current $15 billion ($10 billion of Treasury securities + $5 billion of agency mortgage-backed securities) per month to $30 billion ($20 billion of Treasury securities + $10 billion of agency mortgage-backed securities) per month starting from January 2022.
The decision to speed up tapering comes as the central bank felt that “the economy no longer needs increasing amounts of policy support”, Fed Chairman Powell explained during the press conference. He also mentioned that the recent pace of inflation is “uncomfortably high” and employment in the U.S. is making substantial progress towards the central bank’s maximum employment goal. And so, the committee felt that the time has come to progressively withdraw from the policy enacted in response to the pandemic. Hence, in March 2022, the Fed’s massive bond buying programme will come to a complete halt, opening the way for interest rate hikes.
Dot plot indicates aggressive rate hikes for 2022
In the released quarterly projection materials, the dot plot shows a big shift in the dots upwards, indicating that more members are now expecting interest rate to be at a higher level for the next few years. Specifically, all 18 members of the committee expect at least one rate hike while 12 of them expect three rate hikes in 2022. Also, 11 members expected that interest rate will return to the pre-pandemic level of 1.5-1.75% in 2023, contrasting from the previous projection materials that only three members expect so. The sense of urgency for more rate hikes come as inflation has escalated to a near 40-year high level.
Persistent inflation
Ever since consumer prices set new highs in decades for two consecutive months, the Fed has changed its view that inflation is transitory. The central bank’s Chief is now acknowledging that inflation “may be more persistent” and is having an upward pressure on inflation expectations. It was also mentioned in the rate statement that supply and demand imbalances have led to “elevated levels of inflation”. Thus, the Fed has revised PCE inflation expectations upwards for 2022.
Moving forward, we can expect the Federal Reserve to wind up its QE during the first quarter of 2022 since good progress towards its dual mandate has been made – annual inflation has more than doubled the central bank’s target for several months and the rate towards maximum employment has been fast and is expected to continue in the near future.
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