MNI EXCLUSIVE: Fed 'Dots' To Shift Into 2022 and 2023

More Fed officials next week are set to forecast interest rates lifting away from zero by 2023, sooner than they expected in December and potentially complicating Fed Chair Jay Powell's message that policy will stay ultra accommodative until the economy is far along the road to recovery, former officials told MNI.

The FOMC's December forecasts featured only one official penciling in a rate rise next year while five saw hikes in 2023. But they factored in very little of the impact of the USD1.9 trillion spending bill just approved, adding to the USD900 billion relief delivered late December, or of the accelerating vaccine rollout. Analysts now expect potentially record-shattering growth and higher inflation in 2021.

"It would be very surprising if there weren't at least some more dots in 2023. There may not be any more in 2022. The question is whether it would be enough to move the median," former Fed vice chair Donald Kohn told MNI. Five more projections for above-0.25% rates in 2023 are needed to shift the Fed's dot plot median.

"The last time they still didn't have the December stimulus, there was no sense of what might be coming this year," Kohn said. "Also the vaccine rollout. Now with the extra doses and all that it looks a lot better."

The economic outlook is "considerably better" compared to December, said William English, former director of the division of monetary affairs at the Fed Board, adding that some officials might now revise their previous expectations of the central bank's asset purchases continuing well into 2022. "Now they may see the purchases being wound down earlier next year."

REALIZED PROGRESS

"I wouldn't be at all surprised if they've worked out their outlook enough to get the majority of them to lift off in 2023," English added. "I expect there will be a few more people who certainly see lift off in 2022 but my guess is it won't be all that many because they've emphasized that they're going to be patient," he added.

Powell has made clear the Fed will need to see actual improvement in employment and inflation data before slowing bond purchases and raising rates, and the FOMC is aware that inflation will ramp up temporarily on base effects and a surge of pent-up demand.

The former officials said the Fed will be measured in its reaction to more optimistic forecasts, especially given their recent shift to a 2% average inflation objective and broader definition of full employment.

NO UPSIDE

"They are absolutely dedicated to both of their statutory objectives, and they believe they have to be patient to see those realized," former Atlanta Fed President Dennis Lockhart told MNI. "They will restrain themselves more about reacting to overheating than many commentators believe."

"You may have some more dots showing a rate move in 2022 and a few more prepared to reflect an earlier liftoff in their forecasts" he said, but officials will, on the whole, be "patient and cautious about making any move until they're convinced that they're on track to achieving those two objectives."

Officials have been similarly reticent to discuss the timing of a tapering of QE, saying only that they will signal changes to asset purchases far in advance.

"There's just no upside to talking about anything suggesting an end to purchases," said Bill Nelson, former deputy director of the monetary affairs division at the Fed Board. "They want to continue to provide stimulus. It's not helpful for their purposes if they say something that causes rates to go up."