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Question #6 for 2022: Will the Fed raise rates in 2022? If so, how many times?

by Calculated Risk on 1/02/2022 11:57:00 AM

Earlier I posted some questions on my blog: Ten Economic Questions for 2022. Some of these questions concern real estate (inventory, house prices, housing credit, housing starts, new home sales), and I posted those in the newsletter (others like GDP and employment will be on my blog).

I’m adding some thoughts, and maybe some predictions for each question.

6) Monetary Policy: In response to the pandemic, the FOMC cut rates to zero, and initiated an asset purchase program in March 2020. The FOMC is currently on pace to stop the asset purchase program in March 2022. A majority of FOMC participants expect three rate hikes in 2022. Will the Fed raise rates in 2022? If so, how many times?

First, on asset purchases from the December 2021 FOMC statement:

“In light of inflation developments and the further improvement in the labor market, the Committee decided to reduce the monthly pace of its net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities. Beginning in January, the Committee will increase its holdings of Treasury securities by at least $40 billion per month and of agency mortgage-backed securities by at least $20 billion per month. The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.”

The current plan is to end asset purchases in March 2022.

As far as rates, in March 2020, in response to the pandemic, the Fed cut rates to essentially zero, and held rates at zero ever since. Now most analysts expect the FOMC to raise rates in 2022, perhaps as early as the March meeting.
From Goldman Sachs:

“High inflation is likely to keep the Fed on a quarterly tightening path next year. We expect the FOMC to raise rates three times starting in March and to announce the start of balance sheet runoff, which is likely to proceed more quickly than last cycle. Our forecast calls for three additional hikes per year in 2023 and 2024 and a terminal rate of 2.5-2.75%.”
As of December, looking at the “dot plot”, the FOMC participants see the following number of rate hikes in 2022:

No Change 0
One Rate Hike 1
Two Rate Hikes 5
Three Rate Hikes 10
Four Rate Hikes 2

Clearly the main view of the FOMC is three rate hikes in 2022.

The next two FOMC meetings are January 25th and 26th, and then March 15th and 16th. Currently I expect asset purchases to end as planned in March, and the 1st rate hike to happen at the March meeting, and perhaps a 2nd hike in June. Subsequent rate hikes will depend on the course of the pandemic, inflation and employment, but 3 rate hikes in 2022 seem likely. It also seems likely that the FOMC will announcement the end of reinvestment sometime in 2022 (start “balance sheet runoff”).

Some thoughts:

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