Fed rate hike??

How many rate hikes will we actually see in 2022?


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David Goldsmith

All Powerful Moderator
Staff member
To fight inflation Fed Chair Jerome Powell has announced tapering asset purchases and potential rate hikes. Last time this was tried "taper tantrums" in the market quickly put an end to it.

How many rate hikes will we actually see in 2022?
 

David Goldsmith

All Powerful Moderator
Staff member


Goldman predicts the Fed will hike rates four times this year, more than previously expected


  • Goldman Sachs expects the Federal Reserve to raise rates four times this year, one more than previously forecast.
  • The estimate comes amid rising inflation and a tightening job market.
  • Along with the rate hikes, Goldman sees the Fed shrinking its bond holdings soon.

Persistently high inflation combined with a labor market near full employment will push the Federal Reserve to raise interest rates more than expected this year, according to the latest forecast from Goldman Sachs.
The Wall Street firm’s chief economist, Jan Hatzius, said in a note Sunday that he now figures the Fed to enact four quarter-percentage point rate hikes in 2022, representing an even more aggressive path than the central bank’s indications of just a month ago. The Fed’s benchmark overnight borrowing rate is currently anchored in a range between 0%-0.25%, most recently around 0.08%.

“Declining labor market slack has made Fed officials more sensitive to upside inflation risks and less sensitive to downside growth risks,” Hatzius wrote. “We continue to see hikes in March, June, and September, and have now added a hike in December for a total of four in 2022.”
Goldman had previously forecast three hikes, in line with the level Fed officials had penciled in following their December meeting.
The firm’s outlook for a more hawkish Fed comes just a few days ahead of key inflation readings this week that are expected to show prices rising at their fastest pace in nearly 40 years. If the Dow Jones estimate of 7.1% year-over-year consumer price index growth in December is correct, that would be the sharpest gain since June 1982. That figure is due out Wednesday.
At the same time, Hatzius and other economists do not expect the Fed to be deterred by declining job growth.







Hatzius thinks those converging factors will cause the Fed not only to raise rates a full percentage point, or 100 basis points, this year but also to start shrinking the size of its $8.8 trillion balance sheet. He pointed specifically to a statement last week from San Francisco Fed President Mary Daly, who said she could see the Fed starting to shed some assets after the first or second hike.
“We are therefore pulling forward our runoff forecast from December to July, with risks tilted to the even earlier side,” Hatzius wrote. “With inflation probably still far above target at that point, we no longer think that the start to runoff will substitute for a quarterly rate hike.”
Up until a few months ago, the Fed had been buying $120 billion a month in Treasurys and mortgage-backed securities. As of January, those purchases are being sliced in half and are likely to be phased out completely in March.
The asset purchases helped hold interest rates low and kept financial markets running smoothly, underpinning a nearly 27% gain in the S&P 500 for 2021.
The Fed most likely will allow a passive runoff of the balance sheet, by allowing some of the proceeds from its maturing bonds to roll off each month while reinvesting the rest. The process has been nicknamed “quantitative tightening,” or the opposite of the quantitative easing used to describe the massive balance sheet expansion of the past two years.
Goldman’s forecast is in line with market pricing, which sees a nearly 80% chance of the first pandemic-era rate hike coming in March and close to a 50-50 probability of a fourth increase by December, according to the CME’s FedWatch Tool. Traders in the fed funds futures market even see a nonnegligible 22.7% probability of a fifth rise this year.
Still, markets only see the funds rate increasing to 2.04% by the end of 2026, below the 2.5% top reached in the last tightening cycle that ended in 2018.
Markets have reacted to the prospects of a tighter Fed, with government bond yields surging higher. The benchmark 10-year Treasury note most recently yielded around 1.77%, nearly 30 basis points higher than a month ago.
 

David Goldsmith

All Powerful Moderator
Staff member

JPMorgan CEO Jamie Dimon says 'there could be 6 or 7' interest rate hikes​


Jamie Dimon sees more rate hikes than we think for the U.S. economy this year.
The JPMorgan (JPM) chief executive officer predicted on Friday that rising inflation could prompt the Federal Reserve to raise short-term borrowing costs as many as six or seven times, doubling down on his earlier bet that the currently-anticipated three to four increases are likely a low estimate of what investors can expect.
“My view is, there’s a pretty good chance there will be more than four — there could be six or seven,” Dimon said during a post-earnings conference call Friday morning. “I grew up in a world where Paul Volcker raised his rates 200 basis points on a Saturday night.”

A JPMorgan spokesperson said Dimon was discussing the "possibilities over time, not probabilities," in his remarks and it really depends on the value of such hikes.

The Fed has made a sharp, hawkish turn on monetary policy in recent months amid a backdrop of surging inflation and a faster-than-expected labor market recovery to tilt towards a quicker pullback of pandemic-era stimulus. The pivot has prompted big Fed watchers — the likes of Goldman Sachs and Deutsche Bank among them — to revise their outlooks in anticipation that short-term interest rates will be higher by the end of 2022 than where they are now.

Dimon has been among that cohort, previously expressing his view that the U.S. economy could absorb more than four rate hikes this year.
“This whole notion that it’s somehow going to be sweet and gentle and no one is ever going to be surprised I think is a mistake, but that does not mean we won’t have growth,” the nation’s top banker said during the call after JPMorgan’s fourth quarter earnings release.
JP Morgan CEO Jamie Dimon looks on during the inauguration of the new French headquarters of US' JP Morgan bank on June 29, 2021 in Paris. - American bank JP Morgan's new trading floor is the latest example of how Brexit is changing Europe's financial landscape since January. (Photo by Michel Euler / POOL / AFP) (Photo by MICHEL EULER/POOL/AFP via Getty Images)

JP Morgan CEO Jamie Dimon looks on during the inauguration of the new French headquarters of US' JP Morgan bank on June 29, 2021 in Paris. - American bank JP Morgan's new trading floor is the latest example of how Brexit is changing Europe's financial landscape since January.
“At this point, it’s up to the Fed to thread the needle: slow down the growth in inflation without stopping the growth,” he said, adding that he has "a lot of faith in Jerome Powell.”

Hennessy Large Cap Financial Fund Portfolio Manager David Ellison told Yahoo Finance Live that if Dimon’s estimate is correct, assuming increases of 25 basis points each, that would mean short-term rates could be up 2% by the end of the year.
“If it’s that much, the market is going to have a lot of trouble across the board, just because the last time we did this, it got beat up,” said Ellison, who criticized Dimon's remarks on rate hikes calling it "an irresponsible comment" because of the impact the JPMorgan CEO's comments can have on markets.

Earnings results


Shares of JPMorgan Chase & Co fell as much as 5% in early trading Friday after the company reported fourth quarter earnings that reflected a 14% drop in profits during the period due to a slowdown in trading activity, narrowly beating analyst estimates thanks to strong performance in its investment banking unit. Specifically, the bank saw trading revenue fall 13%, while investment banking revenue jumped 28%, boosted by a blockbuster year for deals. In all, JPMorgan turned a profit of $10.4 billion, or $3.33 per share, in the period ending December 31.
“We broke open the piñata today on earnings and the operative word is in line,” Ellison told Yahoo Finance Live. “I think that’s why the stocks are trading down."

JPMorgan’s core business, loan growth, was up 6%, boosted by economic recovery, and net interest income from lending, while investments in Treasury securities was up 3%. The company, like other U.S. lenders, would benefit from interest rate hikes this year.
 

David Goldsmith

All Powerful Moderator
Staff member

Fed likely to hike rates in March as Powell vows sustained inflation fight​

  • Summary
  • Powell says central bank likely to raise rates in March
  • Fed chief says inflation has not improved since December
  • U.S. stocks reverse course to end mostly lower
The Federal Reserve on Wednesday said it is likely to hike interest rates in March and reaffirmed plans to end its bond purchases that month in what U.S. central bank chief Jerome Powell pledged will be a sustained battle to tame inflation.
 

David Goldsmith

All Powerful Moderator
Staff member


Wall Street Breakfast: How Much, How Fast?​


Many are still trying to size up the Fed's monetary policy for 2022 as the market heads into February. What we know so far is the central bank will begin hiking rates in March, assuming that the "conditions are appropriate for doing so," but it's anyone's guess how aggressive the FOMC will be after that as it tries to snuff out the strongest pace of inflation in decades. There is also debate over when the Fed will start reducing its balance sheet (May, June or July), though it made clear at its last meeting that pandemic-era bond-buying will come to an end next month.

How many hikes in 2022? Estimates on Wall Street now range from three rate increases all the way to seven, with the federal funds rate projected to end the year in a range of 1.25%-2.00% (the current effective floor is 0.00%–0.25%). Check out some of the forecasts below:

Barclays (3): "With reserves balances over $4T and nearly $1.5T in the [Fed's reverse repo facility,] we expect it will be difficult for short-term interest rates to trade much above the interest rate floor."

Morgan Stanley (4): "If they need to hike fast, they will. The Fed is showing urgency and being flexible."

Goldman Sachs (5): "We see a risk that the FOMC will want to take some tightening action at every meeting until the inflation picture changes."

BNP Paribas (6): "We read Fed Chair Powell's comment that this cycle is different from the previous one as an indication that the Fed's bias is for a steeper tightening than the markets and we had envisaged."

Bank of America (7): "The Fed has all but admitted that it is seriously behind the curve. With that said, the markets are doing the Fed's job of tightening financial conditions without an actual hike."
 

Noah Rosenblatt

Talking Manhattan on UrbanDigs.com
Staff member
Emergency fed meeting Monday. Hmm, the last time that happened was???? Expect a rate hike? 25? 50bps? How does this affect markets?

- Inflation running hot
- Fed behind the curve by 175-200+bps?
- Fed yet to start tightening balance sheet, starts in march
- 10YR over 2%, up 70bps in 2 months


Fintwit talking like its 1994 all over again.

Thoughts?
 

inonada

Well-known member
Fed yet to start tightening balance sheet? They are still expanding it. Here‘a a nice interview with Larry Summers skewering the Fed on it:

 

inonada

Well-known member
I wonder if we are going to see amplification of long-term interest rates increases by people rushing for the exits from mounting bond losses. On the institutional side, levered players might seek to de-lever in the face of volatility. Probably more importantly, on the retail side, I wonder how many people have a perception that their “low risk” bond fund is immune from losses, and whether they will pull their money (i.e., sell their bonds) once they see losses mount in their “safe” investment vehicle.

The Fed seems to be in no position to step in, needing to fight inflation and all.
 

David Goldsmith

All Powerful Moderator
Staff member
I currently have low confidence in Fed jawboning. It seems like the only way to deal with >$30 trillion debt is by inflation (or default, but I don't see that as a viable option) so I think we are going to hear lots of talk but I'm not sure there is the ability to raise rates sufficiently to "whip inflation now." I also wonder if they raise rates in amounts that people already expect if it will significantly impact inflation.

I do agree with you about the potential compounding effects of investors fleeing the bond market. I also wonder how the Fed is going to unwind certain positions where they have been acting as "buyer of last resort" for quite a while. Exactly who is going to replace them as the buyer of all these MBS and what kind of returns will they require to purchase?
 

inonada

Well-known member
I don’t know if inflation would “solve” the US govt’s debt issue. Obligations are inflation-indexed effectively, and if you let inflation run then you hurt GDP and therefore taxes.

I think even modest increases in rates will impact inflation. I’ve read one too many 2021-era ACRIS mortgage records with people loading up on ARMs at 1.75-2.5% whose resets will be short rates + 2.75%. Same with stories from people. A lot of people consider the annual cost of a purchase to be the monthlies plus whatever interest they are paying. When the latter has increased by ~50%-ish already, such people will splash around less money IMO.

Additionally, I think such effects will amplify through the wealth effect. I think people tend to spend (on an annual basis) something like 3% of a given year’s increase in wealth. If asset prices reverse, this effect reverses.
 

David Goldsmith

All Powerful Moderator
Staff member
I've seen a large number of people claiming a rise in mortgage rates won't impact Real Estate prices. As I've said a number of times, this might be true if they stay sub 4%. But if they double off the January 2021 bottom (2.65 x 2 = 5.3) I find it hard to believe it won't throw the Real Estate market a curve. I'm seeing some predictions of mortgage rates of 6% to 7% in the not too distant future and IF that were to occur I think it would have a significant impact. I think we also need to take into account that a lot of money has flowed into Real Estate because other options (bonds, savings) were showing close to zero returns. As returns on other investments increase the cap rates on Real Estate also need to increase to keep up, which means downward pressure on prices. So the Fed could easily crash the Real Estate market by raising rates - and I'm not sure they will that risk even if it means continued inflation.

Adjustable rate mortgages resetting were a major factor in the GFC, but as far as I know the vast majority of current ARMs have much longer periods to the first adjustment (>5 years) so I'm not sure we will see a big stress from adjustments, at least not near term. However if rates stay elevated longer term those mortgages you are speaking of could easily be bullets.

To be clear, I think it's fairly obvious I have thought the Fed should have started raising rates over a year ago. I'm just not sure at this point that they haven't painted themselves into a corner.
 

inonada

Well-known member
Thinking that interest rates won’t impact RE prices is dopey. There is no magic number, it’s just a matter of degree.

There’s a difference between crashing RE and having it fizzle. Many people find it too difficult to look ahead: their answer to reasoning around uncertainty in the future is to shrug and give up. So, they simply look at the cost of something now, and how they can get it for as cheap as possible under current conditions. E.g., you buy the 421a abated apt because the monthlies become cheaper now, who knows what happens in N years. Or you take the 5/1 ARM at 2.4%, whose reset is base rate + 2.75%, instead of the 30-year fixed at 2.75% because who knows if you’ll still be there in 5 years. To say nothing of the likely situation that future buyers will not have access to 2.4% ARMs, and what this would imply on the price they’d be willing to pay.
 

inonada

Well-known member
Fixed rates are already above 4%, FWIW. This is a nice source of daily averages:


Over the past 2 years, there’s been this interesting action of conforming rates leading jumbos. I am guessing this has to do with the Fed acting directly in the former market via MBS purchases and only indirectly in the latter. I.e., purchasing pressure pushed conforming rates faster on the way down in 2020, then tapering in late 2021 reversed the effect by removing a large participant in the equilibrium of the market.
 

Noah Rosenblatt

Talking Manhattan on UrbanDigs.com
Staff member
We should do bps. Fed seems around 175-225bps minimum behind curve.I say they raise 75-100bps this year
 

Noah Rosenblatt

Talking Manhattan on UrbanDigs.com
Staff member
Thinking that interest rates won’t impact RE prices is dopey. There is no magic number, it’s just a matter of degree.

There’s a difference between crashing RE and having it fizzle. Many people find it too difficult to look ahead: their answer to reasoning around uncertainty in the future is to shrug and give up. So, they simply look at the cost of something now, and how they can get it for as cheap as possible under current conditions. E.g., you buy the 421a abated apt because the monthlies become cheaper now, who knows what happens in N years. Or you take the 5/1 ARM at 2.4%, whose reset is base rate + 2.75%, instead of the 30-year fixed at 2.75% because who knows if you’ll still be there in 5 years. To say nothing of the likely situation that future buyers will not have access to 2.4% ARMs, and what this would imply on the price they’d be willing to pay.

Fed yet to start tightening balance sheet? They are still expanding it. Here‘a a nice interview with Larry Summers skewering the Fed on it:

1 - taper purchases to zero
2 - raise rates
3 - QT - if we get that far without markets cratering
 

inonada

Well-known member
There has been a lot of movement over the past 6 months, and people seem behind the curve. I remember starting a discussion on SE in Aug 2021 about the effect of eventual exit by Fed from bond & MBS buying, increase to rates, ARMs resetting at a 2.75% margin to (what was then) 1% forward expectations. General response was "We'll be in ZIRP forever" because we're all Japan now and/or Fed will let inflation run rampant. More sober opinions were that we'd see 1% by perhaps 2025.

As late as Oct 2021, market was expecting 0-25bps by March (i.e., no increase). Now it's 50-75bps. For year-end 2022, it was expecting 25-50bps. Now 175-200bps. Just a month ago, it was 100bps. I think most of the RE buyers in the market now are probably in the market based on 2.75-3.00% 30-year mortgage rate expectations from a few months back. They might suck it up even though it's 4.1% now, but the pipeline behind them seems like it will close.
 

inonada

Well-known member
I'm of the opinion the market will do the remaining 75-100bps for the Fed.
What does that mean? The Fed has full control of this rate: if the inter-bank market doesn't match it, it will borrow/lend at that rate until the cows come home and make it happen.
 
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