TD: Dovish No More

TD, the most dovish view sampled in our Fed preview, has pulled forward rate liftoff from Mar 2023 to Jun 2022 and sees 3 hikes in 2022.

• The dot plot surprised with a 75bp increase in 2022, (from 12.5bp in Sep) vs the 50bp that both TD and consensus had expected.
• This came on “sizable upward revisions to inflation projections, with officials still seeing upside risks”.
• Further, Powell made clear that views on ‘maximum employment’ have evolved, “and that officials are ready to start raising rates well before the labor market returns to its pre-COVID state”.
• “We changed our forecast to show rate hikes starting in June 2022, instead of March 2023. We expect a 25bp hike in June, followed by 25bp hikes in September and December as well”.
• They also expect balance sheet runoff to start in Mar 2023, when the target range is 0.75-1.0% rather than waiting for 1-1.25% in the last cycle.
• TD notes that “while the front-end is priced for hikes by mid-year, we think long-end rates are too low” and remain short 10y real rates. They see a favorable cyclical profile for USD.