Nomura: Fed Will Hike 50bp In March, 150bps Total In 2022

Following the January FOMC, Nomura now sees the Fed hiking rates by 50bp in March, followed by consecutive 25bps hikes in May, June, and July. (Previously had expected 4 25bp hikes in 2022).

• “Powell’s comments suggest the FOMC is beginning to coalesce around a more front-loaded policy rate response to elevated inflation, wages and inflation expectations.”
• After this front-loaded tightening, inflation and growth to relent. Nomura sees the FOMC slow to a six-month hiking pace, w 25bp increases in Dec 2022, and Jun and Dec 2023, w a terminal rate of 2.00-2.25%.
• This means an earlier balance sheet runoff: they now expect a May announcement effective June (vs Aug prior). While Nomura’s out-of-consensus expectation for an early end to QE at the January meeting was not met, they correctly anticipated the release of the updated principles on balance sheet normalization.
• They point out that the “principles”, vs the 2014 edition, “suggests runoff will only be “predictable” instead of “gradual” and “predictable.” In addition, it does not rule out outright sales of MBS holdings.” This means that the Fed will engage in a much more rapid runoff pace, with MBS sales an important risk.