Today, the Federal Reserve embarked on its first new tightening cycle since 2015, and its first change in interest rates since the emergency rate cuts of March 2020.

  • The Federal Reserve raised overnight interest rates 25bps to a range of 0.25–0.50%, the first change in the policy rate in two years.
  • QE bond buying ended, but the FOMC has not listed a date by which they will permit their balance sheet to begin declining
  • Although we anticipate a series of 25bps rate hikes in 2022, the markets will have to price a chance of 50bps as Powell seeks “flexibility”
  • An updated quarterly dot plot indicates a median forecast among Fed officials for 7 hikes in 2022 and 3 in 2023, a substantial increase

This will be the 12th Fed tightening cycle in contemporary economic history, but it seems likely at this point, it will end up nothing like the usual five-year mission. One thing we have learned about the post-COVID economy is that everything seems to happen faster than it used to. Recession and rebound, fear and optimism, deflation and inflation are all coming fast and furious and it seems a fair assessment that the coming hiking cycle will function the same way as well.

 

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About the author

Guy LeBas

Director, Custom Fixed Income Solutions

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