Fed Preview: Forecasts from 14 major banks, building a March hike

The US Federal Reserve will announce its monetary policy decisions on Wednesday, January 26 at 19:00 GMT and as we get closer to the release time, here are the expectations as forecast by analysts and researchers of 14 major banks. 

The Fed is widely expected to leave its policy rate unchanged in January. Current market expectations are for the Fed to keep its March bond terminus, hike rates 0.25% at that meeting and use balance sheet reductions, passive or active, as a hedge against future inflation. 

Danske Bank

“We expect the Fed to indicate that the first-rate hike is likely in March if the economy develops in line with expectations, supported by the tight labour market and still very high inflation. It is one of the interim meetings without updated projections or dots. We have changed our Fed call now expecting four 25bp rate hikes this year (in March, June, September and December, up from three previously) and still four rate hikes in 2023. We expect the Fed to start reducing the balance sheet from September. Given the combination of a strong economy and high underlying inflation, we see risks as skewed towards more, not less, tightening. If this scenario plays out, the Fed is likely to hike 25bp at each meeting, not skipping interim meetings.”

Rabobank

“Recent testimony, speeches and interviews have made it clear that the FOMC is gung ho and ready to start hiking in March. Unless we see a setback in the real economy, we expect the Fed to hike each quarter this year. Balance sheet normalization is also likely to come soon. In fact, we expect May to be the first live meeting.”

TDS

“A likely hike in the funds rate in March has been well communicated, so a ‘prepare for liftoff’ signal should not surprise anyone. More important for markets will be any guidance on the likely pace of tightening, via QT as well as the funds rate, in the year/years ahead. We don’t expect definitive signals, unfortunately, and the result could be mixed messages. The chairman will likely talk about ‘normalization,’ consistent with making policy less accommodative rather than restrictive, but he will undoubtedly also express a willingness to move more aggressively if needed.”

ING

“We strongly suspect that we could see the announcement of the ending of QE asset purchases brought forward from the mid-March end-point currently signalled, to an immediate cessation. We also expect the Bank to indicate that March is the likely lift-off point for interest rates and confirm expectations that the balance sheet will start to be reduced later in the year. However, policymakers may note some caution on near-term activity relating to Omicron, which has seen consumer caution kick in while increased worker absences on health grounds are also set to have hit the economy hard in the December-January period. Nonetheless, Covid cases appear to have peaked and a swift economic rebound in February and March should allow the Bank to hike rates by 25bp on 16 March.”

RBC Economics

“We look for the Fed to raise rates soon, but a change is not expected at the January meeting.”

NBF

“With uncertainty and volatility already elevated, we don’t think the Fed will eliminate asset purchases altogether in January as the taper is already on cruise control to finish by March. However, with inflation continuing to surge and uneasiness growing, their stance is likely to remain hawkish. We expect them to prime markets for a policy rate increase as soon as March. There will be no new summary of economic projections published but we will get the usual post-decision press conference with Chair Powell.”

ANZ

“We are doubtful that the Fed will end QE as some in the market speculate. We are also doubtful that the Fed would begin to tighten policy with a 50bps rate rise. Markets may stabilise if the Fed is not as hawkish as some worst-case fears suggest. We do expect that Chair Powell will elaborate on quantitative tightening (QT) although it may be the case that no firm decision has yet been made. From a sequencing perspective, it may be too draconian to signal a near-term start to QT before QE has finished and rates have started to rise.”

Deutsche Bank

“This January meeting is set to be the last before they kick off that hiking cycle, with lift-off set to commence in March as part of the first of 4 hikes this year. However, we argue that there’s a tail risk of an even bigger hawkish surprise over the months ahead, with the possibility that the Fed raises rates in March and then goes onto raise rates 6 or 7 times this year. So maybe the calm before the storm. Also, watch out to see if the committee wants to outline more of their current QT plans. The Q&A could be a popcorn moment for the markets with plenty of questions likely on inflation, the Fed’s hiking path, financial conditions and QT amongst other things.”

CIBC

“The Fed will still keep rates on hold but might ramp up the rhetoric enough to make a March hike more likely than a wait for the meeting after that. A move in March would more readily open the door to four quarter-point hikes, rather than our last official projection for three, so stay tuned on that front. Clues on how quickly the Fed might transition to quantitative tightening after rate hikes commence likely won’t be available in the statement, but we’ll see if the subsequent press conference adds some colour.”

SocGen

“For the current meeting, no action is expected. The Fed is still cutting back on asset purchases and is not in a position to lift rates now. The Fed should complete its tapering and conclude asset purchases in February. It could stop tapering in January, but skipping the last purchases in February would not achieve much, and the Fed has positioned for rate lift-off in March either way. The interest now has shifted to any guidance on reducing the balance sheet. Fed Chair Powell may use the press conference to introduce guidance here, likely saying that Fed officials should be discussing balance sheet normalization at upcoming meetings. The Fed could make an announcement as early as June. The direction matters more than the incremental dollar amounts, and we expect the Fed to consider market and economic feedback on rate hikes before taking on balance sheet normalization.”

Wells Fargo

“We highly doubt the FOMC will start the tightening process and there will not be an update to the summary of economic projections. Instead, we expect Chair Powell to use the meeting to signal the fed funds rate could be lifted at its next meeting on March 15-16. Such a hint could come by indicating that the labor market is close to maximum employment, the remaining criteria the Committee has laid out for lift-off. We expect the statement and Chair Powell in his press conference to downplay the temporary slowdown in growth due to the most recent wave of the virus and highlight the overall strength of the labor market. Following a rate increase in March, we look for the FOMC to raise rates 25 bps per quarter through the third quarter of 2023, bringing the fed funds rate to 1.75%-2.00%. Any new clues regarding the details of balance sheet run-off will be important since several open questions remain regarding the timing, pace, and composition of the Fed's intended balance sheet reductions.”

Citibank

“Our base case is that the Fed will lift-off policy rates in March, hike four times in 2022 and begin balances sheet reduction in July. There are a number of items to watch this week – (1) possible signaling a March rate hike; (2) what about a 50bp first hike? – highly unlikely but Chair Powell and the committee probably will not rule it out; (3) Path of rate hikes; (4) timeline on stopping asset purchases; (5) timeline on balance sheet reduction; (6) No longer a ‘challenging time’ – it is hard to call a 3.9% unemployment rate a “challenging time” for the US economy. The Fed may remove this language in January or another upcoming meeting.”

ABN Amro

“The FOMC is widely expected to keep policy on hold. In light of the continued upside surprises in inflation, and a surge in wage growth, we expect the Committee to strongly signal in its policy statement that it is likely to implement a 25bp rate hike when it next meets in March. This would be consistent with comments from a range of FOMC members in recent weeks that have suggested they favour such a move. A March rate hike would be in line with our newly updated forecast for the Fed – we now expect four such hikes this year, with the risk tilted to an even steeper rise in rates. There could also be some suggestion in the statement that the balance sheet unwind will likely start soon after the end of asset purchases (our base case is May), though we do not expect a formal plan to be announced on this until March. In the press conference, we expect Chair Powell to be asked about the Committee’s current views of inflation risks, whether the Fed might hike at a more aggressive pace, and what the balance sheet unwind might entail. We expect him to strike a hawkish tone given the upside risks to inflation, with the recent weakness in equity markets unlikely to be enough to cause the Fed to change tack at this stage. Indeed, given that tighter financial conditions will likely be necessary for the Fed to bring inflation back under control in the US, we continue to think the bar will be much higher for the Fed to postpone rate hikes than in the past.”

Nordea

“We expect the FOMC to telegraph a rate hike in March. Powell will almost surely dismiss 50 bp. hike speculations. We do not expect any formal announcement on quantitative tightening (QT). Marginally tighter USD liquidity, as well as rate differentials, should support the USD.”