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MS: Sticking With Q3 2022 Liftoff

US OUTLOOK/OPINION
Morgan Stanley sticks with its call for 2 hikes in 2022, starting Q3, despite the Fed dots showing a median 3 hikes.
  • With taper now set to end in mid-March, the Fed has optionality to begin hiking soon after "should conditions warrant". “That decision will be taken "in coming meetings", which puts June in play, one quarter earlier than our call for 3Q22 liftoff”.
  • This was acknowledged by a “marked hawkish shift” in the dots to a median 3 hikes in 2022 on the back of higher for longer inflation and “rapidly” strengthening labour market conditions.
  • “Even after an upward revision to inflation, the FOMC sees risks to the upside”. However, the MS call for liftoff in 3Q22 is tied importantly to their forecast that “core inflation begins to cool from February next year, providing the Fed with more breathing room after the taper ends”.
  • The Fed indicated it can be highly flexible ahead: “Powell emphasized differences between the strength of this cycle vs. last, which we think means there is no playbook for how long the Fed waits to hike after tapering ends”.
  • The same is true re the timing of balance sheet reduction, with further details still expected early next year.
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