VIEW: Standard Chartered Tweak Fed Call

Standard Chartered “now expect the Fed to raise policy rates by 25bp each in March and June 2022 - our previous expectation was for one 2022 hike in September. We still expect two 25bp hikes in 2023 and one in 2024. The 50bp that we expect by the June meeting is faster than the 40bp priced into fed funds markets, but our view that the FOMC will hold fed funds flat in H222 after two H1 hikes is in contrast to the three full hikes priced into fed funds futures for 2022. The FOMC’s December ‘dot plot’ indicated a median expectation of three 2022 hikes.”

• “Our view is that circumstances in H222 are likely to look much different than they do at present. In particular, we expect supply constraints in durable goods to ease, inflation to fall but not to the target, and employment growth to be roughly at potential but with the employment-to-population ratio below pre-COVID trend levels, particularly among minority workers. With upside inflation risk reduced, the need to raise policy rates quickly probably will have abated. Reduced inflation concerns could contrast with the perception that full employment had not been achieved.”
• “If the Fed hikes in March as we expect, we think the short end of the curve will move towards pricing in four hikes for 2022, rather than the three it now implies. We therefore raise our Q122 2-Year U.S. Tsy yield forecast to 1% from 0.75% and to 1.2% from 1.1% for end-2022. We remain comfortable with our core curve flattening view.”