Opinions et Idées

PRE FOMC outlook: Front-loading of tightening with a methodical approach to curb inflation and land softly

29 avril 2022

After a cautious 25 bps increase in the Fed Funds Rate at its March meeting, it is expected that the Federal Open Market Committee (FOMC) will hike rates by 50 bps to fight against inflation at its May 3-4 meeting. In addition, Federal Reserve Chair Powell should announce officially the balance sheet runoff plan.

Please find below what we expect:

  • The FOMC to raise the Federal Funds Target Range to 0.75-1.0%. Chair Powell will signal willingness to hike rates by another 50 bps at one or more upcoming meetings, because inflationary pressures remain strong, and the labor market is ‘extremely tight’. We believe Chair Powell will not rule out a larger rate increase (i.e., a 75 bps hike) if needed, even if it is not on the table at this stage. He will underline that the pace of policy tightening will be data dependent.
  • Federal Reserve Chair Powell to reaffirm the need to move “expeditiously” to bring the Fed Funds Rate to a more neutral level (2.25-2.50%); the degree of overshoot will depend on the inflation outlook.
  • The Fed to announce quantitative tightening by no longer reinvesting the principal payments received from its securities holding. According to the March FOMC minutes, the process will involve a maximum monthly cap of $95bn ($60bn for treasuries and $35bn for mortgage-backed securities) with caps phased in “over a period of three months or modestly longer if market conditions warrant”. We expect runoff to start in June.

We expect the FED to maintain its hawkish tone despite ongoing risks (i.e., China’s strict Zero-Covid policy, the war in Ukraine). This meeting may push US interest rates higher.

Disclaimer
This commentary is intended for non-professional investors within the meaning of MiFID II. It is provided for informational and educational purposes only and is not intended to serve as a forecast, research product or investment advice and should not be construed as such. It may not constitute investment advice or an offer, invitation or recommendation to invest in particular investments or to adopt any investment strategy. Past performance is not indicative of future performance. The opinions expressed by La Française Group are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Published by La Française AM Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française. La Française Asset Management was approved by the AMF under no. GP97076 on 1 July 1997.

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