Hawks Flock to the Fed

The Federal Open Market Committee (FOMC) is scheduled to meet December 14 and 15. Look for the committee to announce that it will accelerate the pace at which it tapers asset purchases - Treasury bonds and mortgage-backed securities - so that the process will conclude in March instead of June. That will open the door for a liftoff in rates in June or sooner. Fed Chairman Jay Powell has made clear that he would like to see some space between the end of the Fed’s asset purchase program and a liftoff in rates, although he is willing to raise rates sooner than June if need be.

The FOMC will also release its forecasts for growth, inflation and rate hikes or what is known as the “dot plot.” Powell has gone to great lengths to try to discourage financial market participants from focusing so much on those forecasts. They are not accurate, nor do they represent a consensus. Instead, they reflect the broad spectrum of views that members have or want to emphasize prior to the meeting. There have been times when participants who do not vote on policy have leveraged the dot plot to amplify their views. Powell’s pleas have fallen on deaf ears so the forecasts have come to signal shifts in monetary policy.

All that said, the forecasts that the Fed releases with the conclusion of this meeting will be historic and make news. We are expecting a majority - maybe even a plurality - of meeting participants to pencil in at least one rate hike. Some could have four rate hikes planned for 2022. Those shifts, coupled with higher forecasts for inflation and lower forecasts for unemployment, will mark the first time the FOMC has openly acknowledged a need to chase, instead of preempt, inflation since the 1980s.

The statement regarding policy will be tweaked to acknowledge much stronger overall growth and inflation. Powell went to great lengths in his testimony to Congress to say that the term “transitory” should be dropped when it comes to talking about inflation. As we feared, inflation has become more broad-based and will likely remain that way even if inflation abates from the red-hot pace we are currently enduring. Watch closely for inflation in medical and shelter costs to pick up in 2022, even as inflation on goods begins to abate. The great unknown is what role the current Delta wave and concerns over Omicron will have on supply chains. The Fed has now concluded that outbreaks are in and of themselves inflationary because of how much they can further muck up global supply chains.

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