BNP Paribas: This Time Is Different; Sees 6 Hikes In 2022

BNP has substantially changed its Fed tightening call in light of the January FOMC: they now see six 25bp hikes (vs 4 previously) with Funds target range reaching 2.25-2.50% at end-2023 (up 25bp vs previous).

• That would mean March liftoff, and hikes at each subsequent 2022 meeting with the exception of November. 50bp hike probability still “limited, especially in the near term”.
• Powell’s comments and the “surprising” release of the document communicating principles for balance sheet reduction has BNP bringing forward its expectation for QT start to July (vs Aug previously).
• Powell repeatedly stated, “this time is different” in reference to this cycle vs previous.
• While the statement was in line with expectations, “the press conference sent an unequivocal signal that the Fed’s view has continued to evolve in a hawkish direction”.
• Additionally, “despite some earlier speculation, it looks unlikely balance sheet policy will take the place of prospective rate hikes."
• BNP sees a higher real rate environment, with the 2018 style “playbook” in which 10Y rates rise, 2s10s flatten, real yields rise sharply, breakevens tighten, 5-10Y outperforms wings, and mortgage basis widens.