A hawkish Fed tilt A hawkish Fed tilt http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\federal-reserves-small.jpg September 22 2021 September 22 2021

A hawkish Fed tilt

Taper may start in November, with first rate hike by late next year.

Published September 22 2021
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Markets—and particularly our liquidity group here at Federated Hermes—had been culling through the macro data and determining there’s almost no way the Fed doesn’t start taking its foot off the gas this year. Based on Fed Chair Powell’s comments at the conclusion of today’s 2-day meeting of policymakers, and the accompanying forward projections and dot plot, it would appear the central bank agrees. Half of the 18 policymakers projected policy rates to start rising by at least a quarter point next year, moving forward the first projected rate hike from 2023 to late 2022, with three more hikes projected for each of the subsequent two years (17 of the 18 saw rates rising in 2023). Powell also strongly indicated tapering could start after the November meeting, assuming reasonable progress in the September and October jobs reports, with the program of $120 billion in monthly asset purchases potentially wrapping up by late summer of next year.

The hawkish tilt reflects the reality of the economy. The delta variant has slowed the expansion, not ended it. The Fed’s real GDP projections for this year were noticeably lower than June’s forecast, but also were significantly higher for 2022—3.8% vs. June’s 3.3% projection. Such growth historically hasn’t required substantial monetary accommodation, though in fairness, this Covid crisis has presented unique challenges. The inflation forecasts—already running well ahead of the Fed’s 2% average long-term target—also were raised as supply-chain bottlenecks and related Covid shortages have proved bedeviling. This argues for the potentially earlier start to tightening, though the September projections still suggest inflationary pressures ultimately will prove transitory, with core PCE falling from 3.7% this year (up from June’s projected to 3.0%) to 2.3% in 2022 and 2.1% in 2023.

From our perspective, it’s nice to know rates won’t stay at current levels for the rest of our lives! (OK, it just seems like we’ve been stuck here forever.) The Fed’s decision to double the counterparty limit on reverse repo to $160 billion also was welcome, not so much because of any current supply issues but for potential hiccups if the drama over the debt ceiling (again, a forced error) builds to a crescendo. We’ll have more on that issue later as we get nearer the real deadline for worrying.

Tags Monetary Policy . Interest Rates . Liquidity .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Personal Consumption Expenditure (PCE) Index: A measure of inflation at the consumer level.

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