Fed’s slow path to ‘normalcy’

The Fed was expected to downplay the possibility of rate hikes anyway. Powell had already said that the beginning of tapering wouldn’t convey any message on rate hikes down the road. So…

Hence, the decision was no surprise, and even the wording of the statement didn’t puzzle anyone. Yet there are people who might think there is a kind of sugar-coating involved therein.

Is there any deception or surprise involved? I think not. Herein enters the famous “dot plot”. However often predictions based on the median “dot plot” prove wrong, market plays continue to watch them closely. Well, a ‘muddling through’ argument says there is a built-in business cycle mechanism that would tame inflation and provides steam to growth in the aftermath of the C•VID shock.

If this is indeed so, very little rate increase will be warranted, even in 2023, because whatever inf lationary surge we currently observe must be transitory. Note that ‘muddling through’ is the order of the day primarily because the full impact of vaccination is yet unclear.

Having said that, the September “dot plot” reveals that 9 out of 18 members predict a rate hike in 2022 – there were 7 in June. Very few members signal high rates however.

The central tendency for the Fed rate is 0.375 basis points for 2022 – 25 basis points hike - and 1.125 for 2023. 2024’s central tendency stands at 2.25. Admittedly there is considerable uncertainty surrounding these projections.

The changes in the statement aren’t numerous and they pertain to the recent increase in C•VID cases. The idea that the Fed will be slow to react, if indeed there is much to react, thus gained more currency thereof.

I am of the opinion that the Fed will move very slowly and in a predictable manner. I also think tapering doesn’t imply rate hikes are around the corner. This is good news – again - for EMs, but not a sign that rates can – or rather should - be cut here.