FOMC Minutes: Further QT and probable larger rate hikes – UOB

Senior Economist at UOB Group Alvin Liew assesses the publication of the FOMC Minutes of the March meeting.

Key Takeaways

“The 15/16 Mar 2022 FOMC minutes was deemed hawkish as the Fed fleshed out details on balance sheet reduction/runoff [BSR] also termed as Quantitative Tightening, [QT], which it signaled will be phased into a monthly cap of US$95bn (‘about $60 billion for Treasury securities and about $35 billion for agency MBS’) faster than the QT of 2017/19 which topped at US$50bn monthly cap. It also spelt out that the QT process could start as early as after the conclusion of the 3-4 May FOMC.”

“The other key element was that while the Fed took the first step of its liftoff with a 25bps hike of the policy Fed Funds Target rate (FFTR), many of the Fed policy makers would have preferred a 50bps hike but deferred to the lower quantum due to the Russia-Ukraine conflict.”

“FOMC Outlook – Faster, Higher, & Expeditiously: Given the explicit indications for more aggressive hikes to combat inflation spelt out in the Mar FOMC minutes and the recent hawkish commentary from FOMC voters including Fed Governor Brainard, we now expect the FFTR will be hiked faster by 50bps in the May FOMC (from our previous forecast of 25bps). A more aggressive 50bps hike in May will also be further affirmed if the Mar CPI inflation (due on 12 Apr) prints comes well above 8% y/y. That said, we caution that any significant escalation of Russia-Ukraine situation (or volatile market conditions), could still trigger another walk-back by the Fed as they did at the Mar 2022 FOMC.”

“We continue to expect 25bps in every remaining meeting of this year. Including the Mar FOMC’s 25bps hike, this implies a cumulative 200bps of increases in 2022, bringing the FFTR higher to the range of 2.00-2.25% by end of 2022 (from our previous forecast of 175bps hikes to 1.75-2.00% by end 2022).”