Since the last FOMC statement on Nov 3rd, where Jay Powell ‘reportedly’ unveiled a ‘Dovish Taper’ – only to unleash the Powell Pivot a few weeks later – bonds and the dollar are higher, gold is unchanged, and stocks are lower…
Source: Bloomberg
Real Yields have surged higher since the Powell Pivot (5Y real yields are the least negative since early Dec 2020)…
Source: Bloomberg
But, since the ‘Powell Pivot’, the STIR market shifted dramatically more hawkish, now pricing in at least one full rate-hike before June 2022…
Source: Bloomberg
Which is dramatically more hawkish than the ‘current’ dots assumed by The Fed…
Source: Bloomberg
What is even more notable is that the market is pricing in an end to the tightening cycle in 2024 (as the 12th-16th ED future has now inverted)…
Source: Bloomberg
Expectations are hawkish and as follows:
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Turbocharge the taper bringing monthly bond buys to $75bln ($25bln cut instead of planned $15bln). This is very consensus; a $20bln cut would be seen dovish.
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Dot plot to include higher 2022 core PCE forecast (median 2.4%, up from 2.2%)
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Dot plot to include 15 of 18 forecasts with liftoff in 2022, creating narrow median of 2 rate hikes.
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Powell to re-emphasize need for “policy flexibility” as the reason before accelerating the taper.
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Powell to push back on need for immediate rate hikes, *emphasizing that the test for hiking is much stricter than the test for tapering.
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Powell to emphasize that while inflation risks have risen, Fed is still waiting to look through economic bottlenecks before making a decision.
So, just how will The Fed adjust to its new hawkish stance and will it entirely fold to the market’s demands?
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The Fed doubled the pace of the taper to $30 billion per month
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The Fed blames elevated inflation on “supply/demand imbalances”
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And the Dot Plot shifted dramatically, showing The Fed expects 3 hikes in 2022 and 3 more in 2023.
That is in line with market expectations…
That is a dramatically more hawkish shift from the previous dots… 10 of the 18 were looking for three hikes in 2022 and two were looking for four hikes.
The Fed also lowere d its unemployment forecast but raised its inflation forecast dramatically in the SEPs…
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Read the full redline below:
