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December FOMC Meeting Recap: Fed Doubles Pace of Tapering & Signals Three Rate Hikes in 2022

The Fed steps up tapering to fight inflation, and the threshold for rate hikes rests completely on the labor market.

Summary

As expected, the Federal Open Market Committee (FOMC) voted unanimously to leave the funds rate target range unchanged at 0–0.25%, and formally announced that it would double the pace of asset purchases tapering (monthly reduction of $20 billion of Treasury securities and $10 billion of agency Mortgage-backed securities (MBS) starting in January 2022, respectively).

 Main Points

• As widely anticipated, the FOMC decided to double the pace of asset purchases tapering, citing persistent inflation pressures and substantial progress towards full employment. The tapering is now on track to be completed around March next year. The threshold for rate liftoff now rests entirely on the jobs front as the updated statement indicates that the inflation threshold even under the Fed’s new average inflation targeting has been met.
• The FOMC dropped the term “transitory” from its statement on inflation, consistent with Powell’s previous remark that it was appropriate to “retire” the term “transitory” during his testimony to the congress. It also revised the statement to acknowledge that inflation has “exceeded 2% for some time” and removed “with inflation having run persistently below this longer-run goal (2%)” in the previous statement.
• The updated dot plot (economic projections) indicated a median forecast of 3 hikes in 2022 (a hawkish shift), 3 hikes in 2023, and 2 hikes in 2024. 10 FOMC members projected 3 hikes in 2022 vs. 0 member at the September meeting and 2 members even projected 4 hikes. The unemployment forecast was revised lower and inflation was revised higher this year and next.
• During the presser, Powell commented that the FOMC members had an early discussion on the timing of the Fed’s balance-sheet runoff, but haven’t made a decision.  

Implications: Timing on rate liftoff depends entirely on the jobs front

Following the release at 2pm EST, the US Dollar (DXY) initially jumped on the hawkish dot plot before shifting lower as Powell spoke. The initial positive reaction from equity markets appeared to be from investors gaining confidence in the Fed’s willingness and ability to fight inflation, thereby reducing the likelihood of stagflation and policy error. Utilities and Healthcare (both are Defensive sectors) were leading markets higher, which indicates some concern about the future path of the economy remains.      

To review graphs click here: December FOMC Graphics