Wall Street: "Fed to Advance Rate Hike to May... Three Times Next Year and the Year After"

After the FOMC Meeting on the 14th, Dot Plot Released
Fed Watch Already Anticipates May Rate Hike
Central Bank's Sharp Policy Shift Seen as Biggest Downside Risk for Next Year's Stock Market
Market Fears a 'Black Christmas'
Expectations for a 'Powell Put' to Prevent Sharp Declines

[Asia Economy New York=Correspondent Baek Jong-min] At the main entrance of the U.S. Federal Reserve (Fed) in Washington, D.C., Christmas decorations are put up around this time of year.

Christmas decorations are hung at the main entrance of the U.S. Federal Reserve. (Photo by Baek Jong-min)

It is a tradition to celebrate Christmas, but this year there is a growing possibility that the Fed will deliver a ‘Black Christmas gift’ signaling a firm tightening of monetary policy.

The Fed is certain to end tapering (asset purchase reduction) early and begin raising interest rates in the first half of next year.

The key questions are how soon the rate hikes will begin and how high the rates will rise.

The market expects Fed Chair Jerome Powell to demonstrate wisdom in absorbing the shock to the market in some way, as a sharp pivot by the Fed could cause tremendous ripple effects.

◇ How many rate hikes next year? Eyes on the dot plot = The U.S. Federal Open Market Committee (FOMC) meeting, held over two days on the 13th and 14th local time, is the first meeting after Jerome Powell’s reappointment as Chair. Since this is the first meeting with Powell signaling a transformation into an inflation fighter, there is considerable analysis that hawkish remarks may emerge.

Powell has ample reason to turn hawkish. The November Consumer Price Index (CPI) surged by 6.8%, and the Producer Price Index (PPI), released just before the FOMC, jumped 9.6%. U.S. media outlets have emphasized that this inflation is the highest seen in 40 years. The Fed’s average inflation target of 2% has long been exceeded. Since the Fed’s judgment that ‘inflation is transitory’ is now criticized as a grave mistake, a rapid change in direction is possible.

Perspectives on rate hikes can be confirmed through the dot plot. The dot plot released in September showed a 50-50 split on the timing of rate hikes, but this time it is certain to tilt clearly toward rate hikes next year.

Jennifer Goldberg, investment strategist at TD Securities, said, "Fed officials realize they need to stop pouring gasoline on the fire." William English, a Yale professor and former Fed official, also evaluated, "This meeting is creating a major change."

The market already expects a rate hike in May. The Chicago Mercantile Exchange FedWatch estimates a 57.8% chance of a rate hike in May next year. Just a month ago, the probability was only 35.7%. Investment bank Goldman Sachs has also moved up the timing of rate hikes to May.

Regarding the number of rate hikes, CNBC forecasts three hikes each in 2023 and 2024. If this plan proceeds, the U.S. benchmark interest rate will reach 2.3% by May 2024.

While rate hikes are a tool to curb inflation, they have negative effects on the economy. Diane Swonk, chief economist at Grant Thornton LLP, predicted, "This FOMC is like the Fed taking its foot off the accelerator and pressing the brake harder than expected."

Concerns that rate hikes could hinder employment recovery must also be overcome. The U.S. unemployment rate has fallen to 4.2%, but there are still 4 million fewer jobs compared to before the COVID-19 pandemic.

Jason Furman, Harvard professor, advised, "The Fed needs to present concrete plans on how to respond to the surge in inflation and the shortfall in employment targets."

Volatility caused by the Omicron variant cannot be ignored either. With growth slowdown forecasts already emerging due to Omicron, risk factors cannot be dismissed.

◇ Will the 2018 Black Christmas be repeated? = According to a Bloomberg survey, global fund managers identified central banks’ policy shifts to tame inflation as the biggest downside risk for global stock markets next year.

The market expects a ‘Powell put’ to defend against a sharp stock market drop. Chris Senyek, strategist at Wolfe Research, warned, "Powell has faced a very difficult communication challenge. If Powell emphasizes that the FOMC will maintain flexibility, the Powell put will remain, but if not, it could escalate into a disaster like December 2018."

On December 24, 2018, the Dow Jones Industrial Average experienced a major correction, falling 2.9% ahead of Christmas due to clashes between the Fed and then-President Donald Trump.