MNI INTERVIEW:Fed To Speed Up Taper, Hike 3 Times in '22-Swonk

The Federal Reserve will likely slow its bond buying more quickly than the newly-unveiled USD15 billion monthly reduction, potentially as early as its next meeting in December, to be able to raise interest rates three times next year, Fed advisor and Grant Thornton economist Diane Swonk told MNI.

"The fact that they left it open in December means a lot of people were thinking we don't want to keep this at only USD15 billion a month," said Swonk, who regularly advises the Fed's board of governors in Washington as well as the Chicago Fed, in an interview.

"It was interesting how Jay (Powell) put it, that we decided to keep it after the December meeting because the December meeting is after when we'd have to do the open market operations. Which means it's complete optionality. It opens the door for December or January."

The Fed announced this week it would begin tapering its monthly USD120 billion program, launched at the start of the pandemic, by USD15 billion per month -- USD10 billion of Treasuries and USD5 billion of mortgage-backed securities.

As Swonk noted, Powell also stated that the Fed "announced another reduction of this size in the monthly purchase pace starting in mid-December, since that month's purchase schedule will be released by the Federal Reserve Bank of New York prior to our December FOMC meeting."

UPTEMPO

A stronger-than-expected employment report Friday, which Swonk accurately predicted, will likely propel Fed officials to want to start raising official interest rates by the middle of 2022. That means having to taper faster.

"It could be in December they set us up for it -- if we get another good month of employment we'll accelerate tapering. I think that's highly probable," she said.

Swonk thinks the Fed will start raising the federal funds rate in June and then execute another two quarter-point increases before the end of 2022.

The economy generated 531,000 new jobs in October while the jobless rate dropped to 4.6%, having started the year at 6.3%. That means officials must not only remain vigilant against inflation pressures that have far outpaced expectations, said Swonk, but also embrace the recovery's strength.

"Rate hikes aren't necessarily just to fight inflation, they're also an acknowledgment of a really robust economy, and that we're healing. And the fact that he also said we could be to full employment by mid-2022 or in the second half of the year, that's important."

Meanwhile, inflation itself has taken a worrisome turn, with the annual gain in CPI exceeding 5% for five months. The Fed was forced to acknowledge greater uncertainty surrounding its view that inflation is "transitory," as MNI reported the central bank would one week ahead of the meeting.

"This was the first time we heard him speak about not just supply chain disruptions but demand as well," she said." I was surprised that they left [the word "transitory"] in, and it was interesting to see Powell's dance on transitory means different things to different people," Swonk said.

POWELL SWAYED

His language indicated that Powell, who has remained a hold-out dovish voice in an increasingly hawkish Fed, is ceding to the concerns of some of his more inflation-leery colleagues.

"He's coming around. When asked if he thinks we could get full employment by 2022, he said yeah. That's a 2022 rate hike then."

She said the Fed's December Summary of Economic Projection is likely to see a clustering of "dot" forecasts moving into 2022 after the September report showed a committee divided between late next year and 2023.

"In December all of a sudden you get all the dots moving into 2022, I wouldn't be surprised by that, or nearly all of them," Swonk said. "And then we also have the Fed saying, since we want to have liftoff in 2022 we need to get this (QE) out of the way sooner. And so starting in January, or announcing in January, but saying that we're going to accelerate the taper."