Deutsche Sees Alternative Dovish Take Of Fed Forecasts

Deutsche Bank gives an alternative interpretation to this week's FOMC dot plot as dovish, versus the widespread (including Deutsche's) hawkish interpretation. This revolves around the combination of the SEP's forecasts of weaker inflation despite stronger demand/lower unemployment on the one hand, and on the other hand, monetary policy not reaching a restrictive stance.

• "In other words, the SEP is consistent with a Committee that does not see the need to tighten policy aggressively to achieve their inflation target over time."
• (MNI pointed out this seeming discrepancy out in our Fed Review).
• The 1st (and per Deutsche, most compelling) reason is that the FOMC may be setting up to hike more aggressively than the dot plot implies, should omicron risks fail to materialize for example.
• The 2nd is that the FOMC may be implicitly bringing forward the timing of balance sheet reduction (somewhat relieving the need for greater hiking).
• The 3rd is that they are confident supply-side inflation will dissipate. The 4th is confidence the global disinflationary regime is unchanged vs pre-pandemic, incl a flat Phillips curve. Finally, the fifth (per Deutsche, unlikely) is that the FOMC may believe the market's read that r-star may be lower than the SEP's 2.5% nominal long-run rate.
• Given the 1st explanation in particular, Deutsche sees risks of 4 hikes, and and QT beginning, in 2022.