Quantitative tightening on the agenda in 2022
The inflation genie is out of the bottle and the Fed will take action.
Published April 6 2022
Phil: I'm Phil Orlando, Chief Equity Strategist at Federated Hermes in New York.
Interviewer: What is your outlook for the Fed's more hawkish turn and monetary policy over the next two years, and how will that impact the economy and the financial markets?
Phil: So the inflation genie is clearly out of the bottle and at the Fed's most recent March 16th FOMC meeting, they ended their 120 billion a month bond buying program and hiked the Fed Funds Rate by a quarter point. If it were not for the Russia conflict, I think they would've hiked rates by 50 basis points. So at the next two meetings on May 4th and June 15th, we think the Fed may very well entertain 50 basis point hikes. After that, we think the three of the next four meetings, the Fed is gonna introduce quarter point hikes. Perhaps they only skip the November 2nd meeting because of the proximity to the midterm elections on November 8th. Next year, we think they will follow up with four quarter point rate hikes over the course of the year. So all in, the Fed will have taken the funds rate from zero two weeks ago, up to perhaps three or three and a quarter percent by the end of calendar '23. Additionally, in either May or June, we think the Fed is gonna introduce its plans for quantitative tightening, which we think will be reducing the Fed's 9 trillion dollar balance sheet by perhaps a trillion dollars a year, either passively or actively in each of the next couple of years. The end result is that all of this will likely slow both economic growth and inflation, but we think will also pressure equity prices and bond yields.
Disclosures: Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices. Views are as of March 24, 2022 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. Federated Advisory Services Company 22-30098 (3/22)