VIEW: SocGen Adjust Tapering & Hike Calls Post-Powell

Societe Generale note that “the 15 December FOMC meeting should not only drop the word ‘transitory' from the narrative, but it is also expected to speed up expectations on tapering. The Fed was on course to end its asset purchasing program by mid-2022. We now see that ending by late March 2022. The Fed's goal behind a faster tapering strategy is to possibly lift rates by mid-2022, as the market already expects.”

• “We expect a rate hike in June, which is six months earlier than our previous expectation. And we expect three hikes in ‘22. Two hikes are a high probability and the third is likely but remains conditional on evidence of growth and inflation, both of which face risks. Markets are pricing in rate hikes of up to 1.50-1.75%, while we maintain our view that the rate-hike cycle should end at 2.00-2.25% by mid-year 2023. Our belief is that the Fed does not need to implement a more restrictive policy to contain inflation.”
• “Former NY Fed President Bill Dudley warned that inflation might push the Fed to lift the Fed funds rate to 3.0-4.0%. Our view is that inflation slows as supply chain pressures ease. For those believing inflation has already gained deeper traction, a more restrictive monetary policy is needed. A neutral Fed funds rate is near 2.5%. Squeezing out inflation pressures, if necessary, very likely requires a rate above 2.5%.”
• “Market inflation expectations are still anchored near 2.5% longer term. This is one measure of Fed credibility. Markets anticipate a return to desired inflation goals without too much work from the Fed. Markets are only pricing in policy tightening sooner, not more.”
• “The next inflation reading due out 10 December, days ahead of the next FOMC meeting, is likely to point to another large increase. Energy prices alone should add 0.2-0.3ppt to the monthly increase, and we forecast a 0.7% m/m gain. No wonder Powell wished to front run and end the focus and commentary on transitory inflation.”