Goldman Now Expects Four Fed Hikes, Sees Faster Runoff in 2022

[MongiIG]

Goldman Now Expects Four Fed Hikes, Sees Faster Runoff in 2022

EconomyJan 10, 2022 

 

 

 

© Reuters

(Bloomberg) -- The Federal Reserve will likely raise interest rates four times this year and will start its balance sheet runoff process in July, if not earlier, according to Goldman Sachs Group Inc (NYSE:GS). 

Rapid progress in the U.S. labor market and hawkish signals in minutes from the Dec. 14-15 Federal Open Market Committee suggest faster normalization, Goldman’s Jan Hatzius said in a research note. 

“We are therefore pulling forward our runoff forecast from December to July, with risks tilted to the even earlier side,” Hatzius said. “With inflation probably still far above target at that point, we no longer think that the start to runoff will substitute for a quarterly rate hike. We continue to see hikes in March, June, and September, and have now added a hike in December.”

In its December meeting minutes, Fed officials signaled they are preparing to move quicker than the last time they tightened monetary policy in a bid to keep the U.S. economy from overheating amid high inflation and near-full employment. These conditions -- along with a larger balance sheet that’s suppressing longer-term borrowing costs -- “could warrant a potentially faster pace of policy rate normalization,” the minutes said.

Officials also saw the timing of reducing the $8.8 trillion balance sheet as likely “closer to that of policy-rate liftoff than in the committee’s previous experience,” according to the minutes.

The U.S. unemployment rate fell below 4% and wages jumped last month, adding to evidence of a tight labor market. 

Goldman’s forecast for the terminal funds rate in unchanged at 2.5%-2.75%.

“Even with four hikes, our path for the funds rate is only modestly above market pricing for 2022, but the gap grows significantly in subsequent years,” Hatzius wrote. 

 

©2022 Bloomberg L.P.

[MongiIG]

Four Fed Hikes May Be Just the Start as Traders Lift Rate Bets

EconomyJan 11, 2022

 

 

 

© Reuters.

(Bloomberg) -- The drumbeat for the Federal Reserve to implement four quarter-point interest-rate hikes this year is growing -- and with the pace that markets have been moving, there’s a possibility that traders soon look to protect themselves against the risk of even faster policy tightening.

Swaps are already suggesting that the central bank’s target will be 88 basis points higher by the end of this year -- seen by many as a sign the market is baking in three hikes, plus the possibility of a fourth in 2022 -- and momentum is building for the first increase to take place as soon as March. With major U.S. inflation data ahead this week, as well as testimony from top Fed officials, it could be just the beginning of a bigger repricing.

“It’s quite possible that the Fed is forced to be more aggressive in this cycle,” said Lou Crandall, chief economist at Wrightson ICAP (LON:NXGN). “You could see wage inflation numbers that require a more aggressive policy response.”

It’s a shift that’s happened with remarkable speed. Heading into the final stretch of 2021, the prospect of a March hike was close to a coin flip, but such an outcome is now close to fully priced in. The 10-year Treasury yields, meanwhile, were closer to 1.5%, a quarter point below current levels. 

And that’s simply the market’s center of gravity. While three-to-four hikes for 2022 is priced in on average, some in the market are betting on less tightening and others more. As the average tightening predicted by market prices climbs closer to a full percentage point, that suggests some traders could be hedging against the risk of five or even six increases. 

To be sure, the bulk of derivative-market activity suggests investors are currently making wagers either side of the central scenario, but it is a risk that has potential to grow, especially if inflation heats up.

Rate hike premium is being added at the margin out to 2024. Option traders are flagging the prospect of eight quarter-point rate hikes by early 2024, up from earlier expectations of around six. Should Fed officials this week decline to walk back the recent message about tackling inflation pressures -- and there are plenty of opportunities for them to do so -- that tightening momentum in options could extend. A hotter-than-expected consumer-price inflation number also has potential to add fuel to the move. 

So if the Fed does fire the starter’s pistol in March -- and the inflation situation warrants -- the four rate increases that the likes of Goldman Sachs Group Inc (NYSE:GS). and JPMorgan Chase & Co. (NYSE:JPM) are now forecasting could be just the beginning. The bond market is alert to the idea that every Fed meeting this year from March onward -- a total of seven -- is potentially live in terms of delivering a rate hike or providing details about the pace of balance-sheet changes.     

Of course, one important consideration for traders assessing the probability of more than four rate hikes for 2022 is whether the Fed’s focus on shrinking its near $9 trillion balance sheet later this year will mitigate the need for raising its key overnight borrowing rate at a much faster pace.

But some think the Fed has little choice but to become more hawkish. Former New York Fed President Bill Dudley said as wage growth likely spurs consumer inflation, “the Fed will have to respond by taking interest rates above neutral well before the end of 2024.”

That said, it’s only the second week of 2022, there’s a long way to go until even the March meeting, and the rate being targeted by the Fed officially is still very much tethered close to zero -- for now.

©2022 Bloomberg L.P.