Faster Taper, Setting Up for Rate Hikes

A renominated Powell is a different Powell. The Federal Reserve didn't raise interest rates today, a policy move we think is overdue, but it made major changes that set the stage for multiple rate hikes in 2022 and beyond.

First, the Fed doubled the pace of tapering to a speed where it could completely end quantitative easing by March, rather than in June. That's important because the Fed has said it wants to finish tapering before it considers raising rates. An earlier end to QE means a potential earlier start for rate hikes.

Second, the Fed's "dot plots," which show the pace of rate hikes expected by policymakers, now suggest three rate hikes in 2022 (assuming they're 25 basis points each), another three hikes in 2023, and two more in 2024. That contrasts sharply with the dot plot from September, when policymakers were evenly split on whether there'd be any rate hikes at all in 2022 and suggested a total of four rate hikes in 2022 and 2023, combined.

Third, the Fed officially removed from its statement the reference to inflation being "transitory," but maintained a reference to "supply and demand imbalances" as the key factor behind elevated inflation. Demand-driven inflation is exactly the kind of inflation for which policymakers think rate hikes are appropriate.

Fourth, the Fed statement added that "[W]ith inflation having exceeded 2 percent for some time, the Committee expects it will be appropriate to maintain [short-term rates near zero] until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment." In turn, the Fed maintained its view that the long-run average unemployment rate is 4.0% while changing its economic forecast to show the job market hitting 4.0% in the Spring. It's almost as if the Fed wants to limit its own discretion about raising rates. Putting this altogether, it sure looks like the Fed will be ready to start raising rates by June, if not earlier.