Mapping the next cycle of rate hikes in the United States
A sharp shift in perspective among FOMC members has led us to advance the normalization of US politics. 2013-2018 is an excellent reference.
As detailed by our Chief Economist Bill Evans on Friday, following the FOMC meeting in June, we have significantly revised our timeline for an American tap and their next cycle of rate hikes.
Ahead of the meeting, we expect the reduction to continue until the second half of 2022, with rate hikes delayed until 2024. We now expect Federal Reserve purchases to be cut until the first half of 2022 after the announcement of policy change in September 2021 – conditional on performance of key data. The rate hikes should then start in December 2022.
How can an event change the expectations so far? Simply, the communications from the June FOMC meeting showed a sharp shift in the Committee’s perspective from a risk-based mindset to a constructive and pragmatic approach. This is most evident in the FOMC’s characterization of the labor market.
During the April press conference, President Powell drew attention to the 8.4 million jobs still to be recovered and to the fact that “participation in the labor market remains[ed] especially below pre-pandemic levels ”.
The June meeting, on the other hand, dropped the quantitative reference to the employment deficit, even if it had only been reduced modestly since then to 7.6 million; and, although the historically low turnout was cited again, the focus has been on increasing turnout in the coming months as the vaccination campaign takes effect and the economy reopens.
Emphasizing that the increase in labor supply should match demand, the unemployment rate is expected to fall from 5.8% to 4.5% by the end of the year and then to 3 , 8% and 3.5% at the end of 2022 and 2023 – the latter a level compatible with “maximum employment”. During questions and answers, President Powell added that he believed the United States would “have a very strong job market fairly quickly here”.
On inflation, while the FOMC continues to believe that the current high level will be transient, in the medium term its concern has clearly shifted from the historic shortfall against the target to wage dynamics. and prices which should be created by a rapid reopening of the economy. and a possible return to “maximum employment”.
The Committee’s median headline inflation expectations for 2022 and 2023 of 2.1% and 2.2% indicate confidence that their inflation ambitions will be met. And, on the risk side, President Powell has made it clear that the committee is focused on the upside, telling the press conference that the committee is “prepared to adjust the stance of monetary policy” if it There are “signs that the inflation path or more forward inflation expectations were moving significantly and persistently beyond levels consistent with our target.”
It is important to note, however, that the Committee is in no rush to tighten its positions now or in the medium term. The Committee is only just beginning its discussion on tapering and rate hikes are not (yet) part of the conversation.
We believe the timeline of events from 2013 to 2018 provides a good baseline for the next round of policy standardization; however, the expected strength of the labor market and household balance sheets should normalize more quickly this time around.
In prospect, in 2013, nearly a year of internal discussions and seven months of communication with the market took place before the FOMC formally announced a tapering in December. The taper then ran from January to October 2014, but it was not until December 2015 and December 2016 that the first and second rate hikes were observed. The third and fourth hikes followed in the first half of 2017, and from December 2017 to December 2018, five more rate hikes were observed thereafter, bringing the fed funds rate to 2.375%.
At the start of the deceleration of this cycle in January, the unemployment rate is expected to be around 4.5%, more than 2 percentage points below its level at the end of 2013. This will allow the FOMC to stop asset purchases. over a period of six months compared to the 10 months observed in 2014, and should also lead the Committee to start the cycle of rate hikes with a shorter deadline. Instead of occurring with delays of around 12 months, the first two hikes in this cycle are scheduled six months after the reduction ends and just 3 months apart – in December 2022 and March 2023.
Thereafter, if the Committee is correct in believing that inflation will be only slightly above the target in 2023, then the FOMC will not be in a rush to continue with a series of rate hikes. Instead, a single further rise to 0.875% is seen in June 2023, followed by a “valuation break” of at least six months.
Beyond our forecast horizon to 2024 and beyond, the longer-term FOMC projection of 2.5% suggests a peak in the upcoming cycle in line with that of 2018. The latter part of this However, this cycle is only likely to occur when necessary, as wages and inflationary pressures accumulate. If they remain benign, expect the FOMC to be slow to act, in pursuit of the best long-term results for the economy.