MNI (Corrected): Fed SEP To Show 5 Or More Hikes For 2022

[Correction Note: Corrects story originally published on Feb. 23, 2022 to make clear Ellen Meade was referring to an upward revision in the fed funds rate path, not the longer-run funds rate, and further clarifies her comments.]

The Federal Reserve's upcoming quarterly economic forecasts are likely to show an increase in the number of rate hikes officials are penciling in for this year to at least five, up from three in December, several former central bank staffers told MNI.

“The dots will show a median expectation of five 25-basis-point rate increases for 2022, but with some skew towards the upside,” said Peter Ireland, a former Richmond Fed staffer and now a consultant at Boston College.

This would not be aggressive as the six rises in the federal funds priced in by rate market participants, and there are questions about the pace and sequencing policymakers will choose.

Some of the dots could show six or seven 25-bp increases, putting the year-end funds rate at around 1.25%, though possibly as high as 1.75% or even 2%, Ireland said.

Fed officials are seen using the Summary of Economic Projections as a signaling tool to get ahead of increasingly hawkish market expectations, the result of repeated inflation surprises culminating in a 7.5% jump in the consumer price index in the year to January. The Fed is widely expected to start raising interest rate in March, though the size of the increase remains uncertain.

(See: MNI INTERVIEW: Fed's Daly Downplays Chances of 50 BP Rate Hike)

TAKEOFF SPEED

“The question is how fast they need to move? One every meeting would be seven rate hikes -- that’s 1-¾. One every meeting would get you close to 2% by the end of the year,” said Donald Kohn, former Fed Vice Chair and now a Brookings fellow. “A dot plot that signaled approximately 25 bps every meeting, would that be enough to convince people they were reacting sufficiently strongly to inflation?”

Ellen Meade, a former special adviser to the Fed’s board, said she sees upward revisions to the funds rate path.

For 2022, “I could see the median going up to five hikes. One person could maybe write down seven, but I would be really surprised to see the median go to seven,” she said.

By 2023, “could I see the fed funds rate moving into neutral? Yes, but with a lot of caveats. Neutral is a range, not a point. Once they get above 2%, we’re starting to talk about the neutral range,” Meade added. The median FOMC official in December saw rates ending 2023 at 1.6%, short of the range of estimates of its longer run level at 2.0%-3.0%.

Some policymakers could favor more aggressively reducing the balance sheet in lieu of sharper hikes as another way to remove accommodation, Meade said. “They could be going above neutral in some holistic sense but you can't evaluate that because each person doesn’t write down the balance sheet that goes with their rates path."

INFLATION UPSIDE

There is also a possibility of upward revisions to the Fed’s year-end forecast for PCE inflation, which registered 2.6% as of December, a figure that looks optimistic by most accounts.

“Year-end inflation forecasts will be raised very modestly though, ultimately, insufficiently. The optics of their raising inflation forecasts meaningfully would be to admit that inflation is moving further away from goal, and that’s not a bridge they are ready to cross,” said Gregory Hess, a former visiting scholar at the Federal Reserve Banks of San Francisco, St. Louis, Cleveland, now president of IES Abroad.

The Fed will see two big reports before the March meeting – a strong payrolls reading is expected for February while CPI is seen posting another outsized gain. The FOMC will respond accordingly, the former officials said.

“The March SEP will show a shift up and frontloading in the profile of tightening over the next 12 to 18 months,” Hess said. (See MNI: Fed To Frontload Tightening But Keep Eye On Jobs -- Ex Officials)