Fed Research Review: Catching Up to Reality – First Rate Hike Likely in May

Dec 16 21, 04:28 GMT

Key takeaways

The Fed doubles the tapering pace to USD30bn per month (up from USD15bn per month), implying an end to QE bond buying in March (from June). This opens the window for a rate hike as early as in spring (March or May).
The Fed now signals three rate hikes in 2022 (up from 50% probability of one single rate hike in 2022 in the September projections).
The reason for the hawkish shift is a combination of still high inflation (the Fed removed “transitory” from the statement) and a tighter labour market (expects maximum employment to be reached next year).
Basically, the Fed catches up to reality and market pricing (and consensus among economists).
We continue to expect three rate hikes in 2022. We now, however, expect the first rate hike will arrive in May (June previously). We still expect the next two rate hikes to arrive in September and December. We expect the hiking cycle will continue in 2023 with four rate hikes.
FX: We continue to forecast EUR/USD at 1.10 in 12M and continue to see downside risk to this.
Fixed Income: We continue to expect a further flattening of the US curve, as Fed hikes roll into the curve in 2022, and target 2% for the 10% US Treasury yield in 2022.