The Fed turns hawkish, betting on a strong labour market

In Short

The widely announced hawkish pivot turned out to be more aggressive than expected by many. The Fed considers that the US economy is -and will be over the coming three years- strong enough to withstand not just the rapid end of bond purchases (which will stop by mid-March), but also eight rate hikes within three years.

Highlights:

  • In line with expectations the Fed will accelerate the tapering. The new scheduled path will lead to zero net pur-chases by mid-March. The shrinking of the balance sheet has not been discussed yet, but it is likely to occur quickly than in the past.
  • An unprecedentedly strong labour market and a persistent overshooting of the inflation target would require, according to the FOMC, three rate hikes in 2022 and 2023 and another two in 2024. This will allow the economy to continue to growth above potential and with unemployment at an historical low for three years.
  • Inflation projections for 2022 were revised substantially higher, and the steep policy rate path announced today is aimed at preventing the deanchoring of expectations, which has overtaken full employment as a policy priority.

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