Fed Preview: Forecasts from 16 major banks, taper bells

The US Federal Reserve will announce monetary policy decisions and release the updated Summary of Projections on Wednesday, December 15 at 19:00 GMT. As we get closer to the release time, here are the expectations as forecast by analysts and researchers of 16 major banks. 

The Federal Reserve is set to accelerate its tapering program in its last decision of 2021. The Fed will also release the Summary of Economic Projections, the so-called dot plot, and reveal how policymakers see the timing of the first-rate increase.

A hawkish policy outlook could lift yields and provide a boost to the greenback in the second half of the day.

ANZ

“We expect the Fed to announce a doubling of its asset-purchase reductions from USD15 B to USD30 B per month, effective mid-January. This will result in tapering being completed by March. The Fed needs to be in a position to raise rates earlier than key voting members currently anticipate if inflation continues to run hot into 2022. Fed members are likely to significantly upward revise their inflation forecasts for 2021 and 2022; the question is how much is not from base effects. The dot plot is likely to shift up and potentially steeper. We expect the first Fed rate hike to occur by mid-2022.”

Westpac

“The pace of the taper is now expected to be doubled at the December meeting such that it will end in March instead of mid-2022. To our mind, and consistent with comments made by numerous FOMC members, this decision is to provide optionality in 2022 to combat inflation risks as and when necessary. When we changed our call to expect the accelerated taper, we also forecast three rate hikes in 2022, beginning in June. Come 2023 and 2024, three additional hikes six months apart are seen, leaving the federal funds rate at 1.625% by June 2024. It will be interesting to see the degree to which the FOMC’s dots are revised in December.”

ING

“We expect a USD30 B reduction for January (to USD60 B of purchases) and a further USD30 B reduction in February with no further purchases in March onwards. As for interest rates the Fed is likely to also indicate earlier action. As recently as March the FOMC dot plot of individual member forecasts suggested that interest rates were unlikely to increase until 2024. The June update moved this to 2023 and then in September the median expectation was for a 2022 move. Next week’s update from the Fed is set to show them shifting to a two-hike view for next year.”

TDS

“The taper pace will likely be doubled to USD30 B per month, consistent with QE ending in March. Officials will likely also convey a more hawkish tone through the statement, the economic projections, and the dot plot. The median dot will probably show a 50bp increase in 2022. We expect enough slowing in inflation and growth to delay rate hikes until 2023, but, for now, strong data are encouraging hawkishness. Scope for USD upside is capped given how much is priced in the front-end.”

NBF

“More hawkish Fed communications in recent weeks are likely to lead to the committee announcing an accelerated pace of tapering that will see net asset purchases wrapped up sooner than previously communicated. We’ll also take receipt of updated Summary of Economic Projections which is likely to show more participants move their federal funds rate projections from 2023 into 2022, as well as a higher median rate next year.”

Rabobank

“We think that doubling the pace of tapering to USD30 B per month would make most sense, because it creates the option of a first hike on March 16. Given Powell’s apparent shift to inflation-fighting, demonstrated in Congress last week, and based on the assumption that the negative impact of Omicron on the US economy remains limited, we now expect two rate hikes in 2022: in the spring (June) and the second half of the year (December).”

Deutsche Bank

“We anticipate a doubling in the pace of tapering, which would bring the monthly drawdown of Treasury and MBS to USD20 B and USD10 B per month respectively. That would see the process of tapering conclude in March, giving them greater optionality for an earlier liftoff. Bear in mind that this meeting will also see the release of the latest dot plot, as well as the projections for inflation, growth and unemployment. On that, we see the median dot in 2022 likely showing two rate hikes, with risks of more, up from September when only half the dots saw any hikes by the end of 2022.”

RBC Economics

“No change in the fed funds target range is expected, but we’ll be watching for any change in the expected timing and pace of future rate hikes.”

BBH

“We expect the pace of tapering to be doubled to USD30 B per month (USD20 B UST and USD10 B MBS). While the Fed has taken pains to try and decouple tapering from lift-off, the market is not having any of that. In the September Dots, 1 policymaker saw a longer-term Fed Funds rates of 2.0%, 4 saw 2.25%, 1 saw 2.375%, 9 saw 2.5%, and 2 saw 3.0%. How can markets reconcile this with a 1.5% terminal rate? They can’t, and when markets realize this, that should give the dollar another leg higher. We can come up with any number of situations where the median for end-2022 shifts to two hikes from one currently, but think it is highly unlikely for the median to shift all the way to three hikes. We do not think it would be hard to get a shift in the end-2023 median to four or five hikes from three currently. In light of recent data, we expect core PCE forecasts to be revised higher and unemployment forecasts to be revised lower. We do not expect significant revisions to the growth forecasts.”

SocGen

“We assume a majority of Fed participants expect to hike rates in 2022. We expect the median to show at least two hikes and think a large number of officials will endorse three hikes. We expect the Fed to hike three times in 2022. If it starts hiking in June as we predict, it has two more quarterly opportunities, at the September and December FOMC meetings, to hike again. Further hikes in 2023 and 2024 are likely in the Fed predictions. More hikes earlier should tend to raise odds that the Fed can raise even further. We expect the Fed to rapidly wind down its Treasury and agency-MBS purchases. By the end of March 2023, the Fed should stop purchasing these long-term assets. We assume the Fed can reduce its monthly purchases by USD30 B per month, twice the USD15 per month pace offered at the November FOMC meeting. The Fed might opt to make the change in more than one step, but we don’t see a need to.”   

CIBC

“It’s been highly telegraphed that the central bankers will opt to speed up their planned tapering, in order to be ready to hike rates by spring should that prove necessary. The market’s expectation for a first hike before mid-year, and a total of 75 basis points of tightening in 2022, looks quite reasonable. It would be hard to foresee the Fed’s logic in deciding that it needed to speed up the timetable for the first hike, but at the same point feel that rates could still be so stimulative all the way through 2023, and to some extent through 2024. An announcement of faster tapering won’t move the bond market on its own. But keep an eye on the ‘dots’. If they move up significantly, that could have the bond market begin to rethink its dovish view on rates beyond 2022.”

BMO

“FOMC is likely to see a doubling in the pace of tapering, ending in March, and thereby setting the stage for rate hikes by around mid-year. At this point, we would look for a series of quarter-point hikes per calendar quarter until we are back above 2% by mid-2024. The risks to this call are faster and ultimately higher, depending on precisely how the inflation dynamics unfold in coming months.”

Citibank

“We expect the Fed dots to drift higher. The team’s base case is for a first-rate hike in June – which is roughly priced by the market, followed by quarterly rate hikes at least until rates reach around 2%, whereas markets price a shallower path to a lower terminal rate (around 1.25-1.5%). The risks to this view are to the upside, implying markets are underpricing the distribution of outcomes. We anticipate a median for two rate hikes in 2022 with three more in 2023 and a median for rates reaching around 2.5% (the Fed’s estimate of terminal) in 2024. It wouldn’t be too surprising to see as many as three hikes in 2022 and as many as four in 2023. However, markets will likely be most reactive to 2022 median that looks likely to come in somewhere around or below market expectations. Close to three 2022 rate hikes priced and a widely expected acceleration of tapering from USD15 B/month to USD30 B/month limits remaining hawkish risks – but with asset purchases concluded in March, Chair Powell might use the press conference to signal that the March meeting is ‘live’ for a rate hike – a scenario markets currently put a low probability on. More hawkish, but less likely, would be any discussion of an earlier than expected move toward balance sheet reduction.”

Nordea

“Our base case is that the Fed’s dot plot will shake out in a 2-hike median in 2022, followed by 3 hikes in 2023 and 4 hikes in 2024 making up a total of 9 hikes (vs. 0.5; 3; 3 and a total of 6.5 in September). Three hikes will slowly but surely be baked into 2022, but market pricing on terminal rates remains low and could be a driver for a lower EUR/USD going into H1 2022. Turning to the balance sheet, we expect the FOMC to increase the monthly tapering speed from USD15 B to USD30 B starting in January, which means that Fed’s tapering process will conclude by mid-March and begin its reinvestment phase. The faster tapering this Wednesday will result in less liquidity to the street, relatively to the former plan, but lifting the debt ceiling will be the driving factor on more expensive USD liquidity.”

BofA

"We expect the Fed to double the pace of taper. Dots should show 2 hikes in 22, 3 hikes in 23 and 24. Chair Powell would likely highlight inflation risks but be noncommittal about the timing of rate hikes amid virus uncertainty. Markets would likely view Fed communication as hawkish on balance, exerting flattening pressure on curve and tailwinds to USD.” 

OCBC

“The balance of risks leans towards a more hawkish than expected Fed, rather than a placid, inactive one. The risk on the USD is a sharper, front-loaded USD gains, preceding an equally steep decline as the market react to what may be deemed as a policy mistake. This results in a sharper, more compressed gain/loss cycle for the USD.”