MNI: Fed's December Dots To Signal 2022 Hike, Ex-Staffers Say

The Federal Reserve's December "dot plot" interest rate forecasts will likely show most officials seeing at least one hike next year and perhaps several others preferring two or three increases, ex-Fed staff economists told MNI.

"The dots need to move higher; possibly a lot higher," said Dean Croushore, an ex-Philadelphia Fed economist now at University of Richmond. "The Fed is way behind the curve at this point."

"By December, hopefully everyone at the Fed will have come to understand that their policy needs to reverse course quickly," he said. The September dots showed half of the 18 FOMC members preferred no rate increase next year. Six members saw one hike and three others called for two increases.

Since then inflation accelerated to the fastest since 1990 at 6.2% in October, above anything the Fed had foreseen earlier this year as officials argued the pressures would be short-lived. "Inflation will give the Fed plenty of cover to hike in 2022, as they will appear permanent and over 3%," said Croushore. "More importantly, inflation expectations have clearly become unanchored."

A COUPLE OF HOLDOUTS?

Price expectations as measured in consumer surveys from the University of Michigan to the New York Fed have climbed to repeated new highs, while market inflation expectations over five years as measured by inflation-linked bonds had also been on the rise until a recent pullback.

"There are lots of factors going on right now that suggest inflation is definitely going to be persistently higher than the Fed wants for a period of time," said Dan Thornton, a former long-time vice president and economic advisor at St. Louis Fed. "We've always been behind the curve, we've never been ahead of it."

Fed Chair Jerome Powell pushed back against the notion of being slow to react to high inflation in his press conference last week. "I don't think that we're behind the curve," Powell said. "Policy is well-positioned to address the range of plausible outcomes, and that's what we need to do. I do think it would be premature to raise rates today," he said, citing failure to restore full employment.

Danielle DiMartino Booth, a former advisor the Dallas Fed, says most December dots will point to at least one 2022 rate hike, with maybe one or two holdouts. "The freight situation is not going to improve any time soon, so there will be sources of inflation that are stubborn," she told MNI. "We haven't seen the worst of housing pushing into the CPI data yet."

JOBS GAME-CHANGER

Cementing the case for an interest rate hike in 2022, the October jobs report not only showed a better-than-expected gain of 531,000 new jobs but also contained upward revisions to prior months that offered a much brighter underlying picture of the job market, despite Delta.

Chair Powell is "coming around," said Diane Swonk, who advises the Fed's board of governors and the Chicago Fed. The Chair's view the U.S. could restore full employment by 2022 shows he's open to one or more rate hikes next year, she said.

Financial markets are placing even stronger bets than ex-officials MNI spoke to, with the CME FedWatch Tool showing 15% odds of four rate hikes by December 2022.

Croushore says the inflation data already pushed Powell to tone down his view that inflation was transitory at the last decision and "he is going to have to be more aggressive than he currently plans, as inflation is now higher worldwide."