WFC: Monetary Policy Monitor: December 2021
Our Monetary Policy Monitor, provides centralized and summarized policy views on our outlook for key central banks. Among the key themes of this December update:
From WFC earlier today … something else to add TO your holiday week(end)reading list IF you were to be so inclined…
G10 Central Banks
- Among the developed economies many central banks have become more concerned regarding the persistence of inflationary pressures, most notably the Federal Reserve. As a result, many G10 central banks should be raising interest rates in 2022 including, among others, the Federal Reserve, Bank of England and Bank of Canada.
- The Eurozone and Japan are notable exceptions. Price increases are less pronounced and broad-based, meaning we expect European Central Bank and Bank of Japan policy to remain reasonably accommodative.
- Our outlook, for the most part, is in line with the most recent consensus forecast. We deviate modestly from the consensus for the European Central Bank, where we see an earlier end to central bank bond purchases, and the Bank of England, where we see faster tightening in 2023.
WFC goes on to talk about ALL CBs and here are comments related TO the Fed
The Federal Reserve has become increasing concerned about persistently high inflation pressures and, as a result, has initiated and accelerated the tapering of its bond purchases, as well as accelerating its rate hike intentions. For the December month, the Fed's overall bond purchases will amount to $90 billion. Consistent with its December announcement, we forecast the Federal Reserve will lower its bond purchases by $30 billion in each of January, February and March next year, bringing its quantitative easing to end by March 2022. In addition, we expect the Federal Reserve to begin raising interest rates by the second half of 2022, and we forecast a cumulative 125 bps of rate increase, in increments of 25 bps per quarter, starting in Q3-2022 through until Q3-2023.
The outlook for a steady, and quite timely, removal of monetary policy accommodation stems from ongoing above-trend GDP growth and continued improvement in the labor market. For U.S. GDP, we see growth of 5.7% in 2021, 4.4% in 2022, and 3.0% in 2023—though even that 2023 forecast is above the potential growth rate of the economy. By the end of 2023, we expect the unemployment rate to have fallen to 3.4%. Meanwhile, although we expect that overall CPI inflation will not remain at its current rate of 6.8%, we expect that inflation pressures will recede only gradually over our forecast horizon. As a result, we expect PCE inflation and core PCE inflation—the Fed's preferred measured—to remain at or above the Fed's 2% target right up until late 2023. The combination of above-trend growth and above-target inflation underlies our outlook for the steady removal of monetary policy accommodation.
Recent Federal Reserve Comments
In late November, Fed Chairman Powell highlighted policymakers' evolving views and increasing concerns about inflation. Speaking to Congress, Powell said inflation is proving more powerful and persistent than expected and, referring to previous descriptions that a surge in inflation was likely transitory, said it is:
"probably a good time to retire that word."
Those increased inflation concerns are shared by other Fed policymakers, at least as reflected in updated interest rate projections released with the Fed's December monetary policy announcement. The median policymaker view of an appropriate path for U.S. monetary policy indicated three 25 bps rate hikes in 2022, another three 25 bps rate hikes in 2023, and two 25 bps rate hikes in 2024.
Wells Fargo vs. Consensus
Our outlook for Federal Reserve monetary policy is essentially in line with the consensus. Given the Fed's December announcement, the U.S. central bank is widely expected to finish its bond purchases by March 2022. With respect to interest rate increases, both Wells Fargo and the consensus see a cumulative 125 bps of rate hikes during 2022 and 2023. That said, Wells Fargo expects an initial 25 bps rate hike slightly later than the consensus (Q3-2022 for Wells Fargo; Q2-2022 for the consensus), but also sees the cumulative 125 bps of rate hikes being completed slightly earlier (Q3-2023 for Wells Fargo; Q4-2023 for the consensus).