VIEW: RBC: Pulling ’22 Forecasts Forward

RBC have “long thought that the Fed would raise rates by 100bp this year in quarterly hikes. Prior to Russia/Ukraine we had been kicking around the idea of pulling some of those hikes forward as it was growing clear the Fed wanted to try and show some meaningful resolve toward inflation.”

• “Given Powell’s testimony today, it's clear Russia is not going to derail hikes in the immediate term and as long as worst case scenarios do not materialise on the geopolitical front from here, we think the Fed will be inclined to do “a series” of hikes (to use Powell’s words) which we take to mean consecutive hikes starting in March and running through the June meeting (so March, May, June).”
• “The Fed is always assessing but we think after the June meeting, when we expect that inflation will have come off the boil to some extent, it would be a great time to take a step back and see where things are economically. We have also highlighted several risks to our baseline economic view for slower but still reasonable growth this year (of ~3.5%), and our sense is by around that time we will get a reasonable view into how things are unfolding by then.”
• “If our view on inflation/growth is correct, this would take some of the pressure off them to keep on at every meeting cycle. So starting in July, as long as our base-case materialises, we can see them starting the process of balance sheet reduction (which they will suggest is the rough equivalent of a hike). From there, even if inflation has slowed as we expect, it will still be elevated enough to compel them to go in September and then again in December.”
• “As we wrote recently, we still like our base-case for growth and inflation but we are mindful of fat-tail risks at the moment. Needless to say that would obviously also apply to our Fed call. As Powell rightly suggested, we are in a fluid backdrop at the moment.”