NatWest: Pulling Forward Tightening Forecasts

With Powell’s tone and the unexpected release on reducing the balance sheet at the January FOMC, NatWest has pulled forward its forecasts for Fed tightening and balance sheet shrinkage.

• They now see 5 hikes in 2022 (up from 3), in March, May, June, Sept and Dec, with 4 more in 2023 (unch) to 2.25-2.50%. They also see QT beginning in May/ June rather than September previously.
• They note that Powell didn’t use the terms “gradual” or “measured” to describe hikes.
• That said, the Fed may want to pause for a meeting before resuming hikes, after the initial urgency, especially after QT begins – so pauses in July and November (the latter ahead of midterm elections).
• NatWest is “less convinced” that inflation will decline and “do not expect the inflation news will suggest quite as much of a reprieve (even though we do show a little moderation due in part to base effects in core inflation)”.