NatWest: Pulling Taper (And Hike) Forward

NatWest expects the FOMC to double the taper pace at the December meeting, with asset purchases ending mid-March, setting up for rate hikes in 2022.

• Statement: Major rework to inflation language, removing “transitory”; “will use several references from Chair Powell’s testimony specifically with reference to inflation”. Possible dissent from Kashkari (to faster taper).
• SEP/Dot Plot: Dots likely to imply 2 hikes in 2022 and 2023 (i.e. same number of hikes by end-2023, 4 in total, as indicated in September, to 1.00%), “but that’s a close call”. 2024 median dot 1.875% (up 12.5bp). Some FOMC members to pencil in 3 2023 hikes.
• Core PCE forecasts raised to 4.3% in 2021, 2.4% in 2022, 2.2% in 2023. Unemployment down to 4.3% in 2021, 3.5% in 2022, 3.2% in 2023, 3.2% in 2024.
• Press conference: Powell to “emphasize flexibility and uncertainty and point to the dot plot as evidence that the fundamental view among the overall Committee hasn’t changed even though they expect another hike in 2022.” Likely to sound a little more open to 2022 hikes but to make clear earlier taper end does not necessarily mean a quick shift to rate hikes – criteria very different.
• Future action: Liftoff in Q3 2022 (previously NatWest saw Q4 2022), and 2 hikes (previously 1) in 2022. 2 hikes in 2022, 4 hikes in 2023, 4 in 2024. Terminal Fed funds to end up closer to 3%, above 2.5% L-R Fed dot.