In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Sunday, May 01, 2022

FOMC Preview: 50bp Rate Hike, Announce "commencement of balance sheet runoff"

by Calculated Risk on 5/01/2022 08:11:00 AM

Expectations are the FOMC will announce a 50bp rate increase in the federal funds rate at the meeting this week and probably also announce the "commencement of balance sheet runoff".

From Merrill Lynch:
"The Fed has signaled a major hawkish shift at this meeting, and we expect them to deliver, with a 50bp rate increase and the announcement of Quantitative Tightening (QT) starting in June.
On QT, the minutes of the March FOMC meeting detailed the plans for reducing the size of the balance sheet, indicating general agreement behind monthly caps of $60bn for Treasuries and $35bn for agency MBS phased in over three months or more. These finalized details clear the way for QT to be announced at this meeting, with starting monthly caps of $20bn for Treasuries and $10bn for agency MBS. Importantly, our US rates strategy team believes QT implementation will actually begin with a lag in June."
From Goldman Sachs:
"Policy actions at the May FOMC meeting seem set after Chair Powell and other FOMC members strongly suggested that they intend to raise the policy rate by 50bp and announce the start of balance sheet reduction.

The key question is therefore what comes next. We forecast another 50bp hike in June followed by a deceleration to a 25bp/meeting pace of tightening for the rest of 2022, but see reasonably high chances that the FOMC will continue to hike in 50bp increments until reaching their median neutral rate estimate of 2.25-2.5%. We will therefore be paying close attention to any comments from Chair Powell at the press conference that suggest the FOMC intends to hike in 50bp increments beyond June."
Analysts will be looking for comments on the size of future rate hikes, the pace of the runoff of assets (not reinvesting), and comments on selling MBS in the future. 

Note: No projections will be released at this meeting.  However, for review, here are the March projections. In March, most participants expected seven rate hikes in 2022.

Wall Street forecasts are being revised down for 2022 due to the ongoing negative supply chain impacts from the pandemic (see China), and the war in Ukraine.  For example, Goldman Sachs is now forecasting a 1.6% increase in real GDP, Q4-over-Q4 for 2022, well below the FOMC projections in March.

GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1
Projection Date202220232024
Mar 20222.5 to 3.02.1 to 2.51.8 to 2.0
Dec 20213.6 to 4.52.0 to 2.51.8 to 2.0
1 Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 3.6% in March. The question is: Will the slowdown in economic growth push up the unemployment rate?  Or will the rate continue to decline?

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2
Projection Date202220232024
Mar 20223.4 to 3.63.3 to 3.63.2 to 3.7
Dec 20213.4 to 3.73.2 to 3.63.2 to 3.7
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of March 2022, PCE inflation was up 6.6% from March 2021. This was a new cycle high. With the ongoing negative impacts on the supply chain, and on energy and food costs from the war, inflation might stay elevated longer than expected.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1
Projection Date202220232024
Mar 20224.1 to 4.72.3 to 3.02.1 to 2.4
Dec 20212.2 to 3.02.1 to 2.52.0 to 2.2

PCE core inflation was up 5.2% in March year-over-year. This was slightly below the February YoY increase, but it is too early to say the core inflation has peaked.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1
Projection Date202220232024
Mar 20223.9 to 4.42.4 to 3.02.1 to 2.4
Dec 20212.5 to 3.02.1 to 2.42.0 to 2.2