Goldman: Preparing For Liftoff And Runoff

The Fed is likely to use this week’s meeting to hint at March liftoff and begin formulating a plan to shrink the balance sheet, Goldman expects.

• There’s a risk the FOMC wants to take some tightening action at every meeting until the inflation picture changes. But while there is “symbolic appeal” to ending QE immediately, Goldman suspects that if they planned to do this “they would have said so by now”.
• Press conference: Powell might offer hints about the balance sheet discussion, but do not expect a final decision and a new set of normalization principles until the March meeting at the earliest.
• Future action: Four hikes in 2022 (March liftoff), QT announced at July meeting, with $100B peak runoff caps ($60B Tsy / $40B MBS) after a 3-month ramp-up period (though “could easily imagine the FOMC dispensing with the ramp-up altogether”); roughly same impact as a 30bp rate hike.
• 25bp hikes at consecutive meetings more likely than 50bp hike(s), and even that would be a major step. May meeting could see a possible hike as well, or an earlier balance sheet announcement.