The authors are economists from Shinhan Investment Corp. They can be contacted at [email protected] – Ed.
Outlook for 2022 for US monetary policy: 1) Inflation down 1H vs. increasing at 2H
One of the key issues in financial markets lately has been an early tightening of monetary policy in the United States. We looked at the broad policy objectives of the Fed to predict its monetary choices next year. First, the US Consumer Price Index (CPI) is expected to peak at the end of the year or early 2022, and slow to levels of 3-4% in 1H22 with the effects of the chain disruptions. supply and falling high energy prices. The Fed is expected to start raising interest rates in 2H22, as rising wages should trigger demand-driven inflation.
2) Resumption of employment in 2S, 3) neutral financial conditions, 4) fiscal deleveraging
Second, we believe that the labor market recovery expected in 2H22 will not be enough to raise interest rates. The United States appears to be close to full employment with an unemployment rate below 4%. However, past trends show that the Fed raised rates about a year after employment returned to pre-crisis levels.
Third, liquidity and credit indicators, which are barometers of financial market conditions, should remain stable. It should be noted that government liquidity and credit support are still in place.
Fourth, the Fed has called for more fiscal stimulus since the start of the COVID-19 pandemic. A faster reduction in asset purchases is likely to create an imbalance between supply and demand in US Treasuries. Decisions to raise rates will take into account long-term yield levels, with the Fed driving the government’s debt relief efforts. We expect three or four rate hikes through 2023 given the spread between short-term and long-term Treasury yields during previous rate hike cycles.
Fed rate hike cycle to start in 2H22
Overall, the Fed is likely to hike interest rates once or twice in 2H22 rather than 1H22. The tightening cycle will begin in 2022, but we expect the accommodating liquidity environment to continue given the Fed’s estimate of a neutral rate of 2.5%.