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Federal Reserve officials have a message for investors ramping up 2022 interest-rate expectations: not so fast.

None of six Fed officials speaking so far this week have backed the idea of a half-point rate increase in March, and the most aggressive, James Bullard, president of the St. Louis Fed, said five hikes -- one more than every quarter -- is “not too bad a bet." 

Ideally, the Fed prefers to go gradually, said Kansas City Fed chief Esther George, who’s another hawk. The measured calls contrast to Wall Street forecasts for as many as seven 2022 hikes, or even a half-point adjustment.

With the inflation rate near a 40-year high, Chair Jerome Powell last week said the Federal Open Market Committee had penciled in a rate hike for its March 15-16 policy meeting. He declined to take a half-point move off the table or outline the pace of further increases, leaving the door open to moving quickly if needed. 

But the officials, speaking on behalf of themselves, have since made clear that their strong preference was not to move with too much haste.

“They want to be steady captains of the ship," said Julia Coronado, founder of the research firm MacroPolicy Perspectives. “They don’t want to look panicked or rushed. You don’t want to be the driver of unnecessary volatility" in markets, she said.

 

Investors have raised bets on the pace of increases since Powell spoke, shifting to roughly five this year versus the three that officials forecast in December. Wall Street economists have split over how many times the Fed will act, penciling in as many as seven hikes as well as the risk that officials lift rates by 50 basis points -- the first increase of that magnitude since 2000 -- to keep price pressures at bay.

There have been no public remarks this week from the Fed board in Washington, where Powell is awaiting confirmation by the U.S. Senate for a second four-year term as chair, alongside Lael Brainard, who’s nominated to be vice chair. The officials who’ve spoken are regional Fed presidents and include three currently voting on policy.

“They are putting the brakes on a little bit and signaling that rate expectations should stabilize around the current implied rate," said Aneta Markowska, chief U.S. financial economist at Jefferies. “They are saying it is at a point where it is enough."

What Bloomberg Economics Says...

“The market appears to have interpreted Federal Reserve Chair Jerome Powell’s hawkish post-FOMC press conference as evidence the central bank is admitting it’s behind the curve, and will have to catch up by hiking rates aggressively this year. That might be both wrong and the outcome Powell was aiming for."

-- Tom Orlik and Anna Wong, economists 

 

The FOMC in its December dot-plot forecasts penciled in three rate hikes in 2022, though Powell told reporters Wednesday that inflation had since come in “slightly worse" than expected, suggesting the projections could tilt to show more increases when it is updated in March.

Economists say the dot plot’s median forecast could shift up to signal four hikes based on current data, though it would seem unlikely to move more. But the picture is complicated by a change in who sits on the FOMC. 

Governor Randal Quarles and Vice Chair Richard Clarida -- viewed as being somewhat hawkish -- have both departed. Their seats, plus one that’s already vacant, are to be filled by three new governors nominated by President Joe Biden who are expected to be more dovish. The Senate Banking Committee holds a confirmation hearing for them on Thursday.

The Fed also plans to reduce its $8.9 trillion balance sheet later this year, though the pace and timing of tightening haven’t been agreed on. George, speaking Monday, suggested a more aggressive tightening on holding of securities would allow for a shallower rate path. Economists say the Fed may choose to pause its rate hikes when it starts balance-sheet normalization.

“A number of them will also factor in the shrinking of the balance sheet" in projecting rates, said Roberto Perli, a partner at Cornerstone Macro in Washington. “If the shrinking process starts over the next couple of quarters, I estimate it would substitute for a couple of rate hikes by the end of 2023."  

Over the past two decades, Fed tightening cycles have been gradual and predictable starting with the stair-step “measured" pace increases of the 2000s. After the financial crisis, the Fed got off to a slow start as slumping international economies and too-low inflation -- combined with an agonizing, jobless recovery -- warranted caution.

Now Fed officials are repeatedly saying policy will evolve with the data. They’ll get two additional consumer price reports before the March meeting.

The economic growth outlook could factor into how aggressive the Fed wants to be. First-quarter gross domestic product will likely be weak due to an increase in Covid-19 infections blamed on the omicron strain, which will also trim January’s payrolls. 

A downturn in growth, if it looked like it would prove lasting, could sway Powell and his colleagues. After raising rates in 2017 and 2018, the officials backtracked in 2019 and cut rates at three consecutive meetings.

“The Fed does still have to show a little caution," said Michael Pugliese, an economist at Wells Fargo Securities. “ It doesn’t wasn’t to overtighten and end up with a policy mistake."

 

This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.

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