VIEW: J.P.Morgan Now See 7 FOMC Hikes In ‘22

J.PMorgan note that “although there wasn’t much news in today’s FOMC minutes, we are revising our Fed expectations for this year, removing the two previously-expected pauses to now look for seven hikes this year, up from five in our prior outlook. We continue to look for three hikes next year. Several developments contribute to this revised outlook. First, of course, was the increase in the January CPI, not only its size but its breadth, pointing to risks of a more entrenched inflation problem. As today’s minutes reasonably noted, faster-than-expected inflation means more rate hikes. Second, the growing hawkishness of other large central banks should reduce the risks of extreme dollar strength as a reason for the Fed to take a pause. Such strength stymied Fed expectations in 2014 and 2015 for a steady pace of hikes, but even with liftoff close at hand this threat appears limited. Third, unlike 2017, the Committee doesn’t seem to see a case for taking a meeting off when it starts balance sheet reduction. Fourth, Fed rhetoric appears to be moving toward a hike a meeting. For example, SF Fed President Daly recently advocated a “measured” pace of hikes, the same language used in 2004-06. We continue to look for balance sheet reduction to be announced in June, though the language in today’s minutes (“sometime later this year”) suggests risks are tilted toward a 2H announcement.

• “We do not see recent Fed rhetoric as advocating a 50bp hike in March. While Bullard has made this case, we thought the more telling message was from the usual well-sourced members of the Fed press corps, who uniformly pushed back against Bullard. Nor do we think the Fed will have to validate market expectations of 50bp, should that persist going into the March meeting; while market expectations can matter, we think the Committee views its job as trying to communicate to the market what it expects to do, and then do it, whether the market agrees or not.”
• “Given the usual lagged effects of monetary policy, more hikes this year should imply somewhat softer growth next year.”