Fed Raises Rates But Lacks Consensus, Seeing Moderation In Inflation In 2022

Today the Fed decided, as largely expected, to raise rates for the first time since 2018. However, this was not a consensus decision as James Bullard of the St Louis Fed, would have preferred a larger 50bps hike.

The committee’s views on the likely trend for rate increases in 2022 largely mirrors that of the bond market, with rates expecting to end the year in the 1.75% to 2.5% range implying many more rate increases this year, but with risks on both sides.

For example, one policy-maker, perhaps Bullard, expects to see rates end 2022 at over 3% and another policy-maker sees rates at half that level. However, there is clear consensus that rates will increase sharply in 2022 based on policy-maker expectations and bond market futures.

Ukraine

The Fed also offered an early read on the policy impact of Ukraine, stating that. “The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.” For now, the Fed continues to be very focused on inflation and the situation in Ukraine with additional increases in commodity prices due both the war itself and related sanctions and supply-chain disruption are expected to push prices still higher.

Projections For Inflation

The Fed is also perhaps somewhat optimistic on U.S. inflation in its latest forecasts, despite the view that Ukraine could raise prices further. Remember inflation is currently running at 7.9% for February. Policy makers are forecasting inflation for 2022 of around 4.3% or 4.1% excluding food and energy. That would require quite a drop in inflation from current levels and any Ukraine-related price surge to be short-lived. However, those inflation forecasts are also a significant increase from the projections that the Fed shared in December.

There remains a broad range of outcomes for the Fed’s rate decisions in 2022. Currently inflation is very much the concern, but policy-makers disagree, using the latest predictions on whether we’ll see just another four 25bps increases from here, or perhaps as many as eleven. Rates seem set to rise on current expectations, but it’s unclear just how much. The Fed and the markets aren’t sure either.