Fed View: Rate hike in March; balance sheet runoff soon after – ABN AMRO

Economists at ABN AMRO bank have brought forward their expectations for the start of interest rate hikes by the Fed from June to March while predicting balance-sheet run-off to kick in soon after.

Key quotes

“Following further unexpectedly strong labor market data last Friday, and a number of Fed speakers (Barkin and Bostic) since showing openness to a March interest rate rise, we have brought forward our expectation for the start of rate hikes from June previously.“

“Following a 25bp hike in March, we continue to expect the Fed to hike at a quarterly pace until it reaches the pre-pandemic target range of 1.50-1.75%, but this is now expected to be reached one quarter sooner – in Q2 2023. As such, we now expect four hikes in 2022, up from three previously, while we continue to expect three hikes in 2023.” 

“With the December FOMC minutes last week providing confirmation that the Fed is likely to take a more aggressive approach to winding down its balance sheet, we now expect this to begin soon after the March lift-off, perhaps as soon as May.” 

“Initially, we expect this new round of QT to start at a slow pace of $15bn per month, with the pace doubling each month until it reaches a $60bn per month pace (this amount includes both Treasuries and MBS; the Treasury portion being c.$40bn).”