Why we pivoted on the number of Fed rate hikes
Previously, we expected the Federal Reserve (Fed) to increase the Fed Funds rate three times with an upward bias. However, the following data points forced us to reassess our base case:
- 1.2 million more jobs during November through January;
- A significant reacceleration of wage growth as average hourly earnings increased 5.7% from a year ago and 6.9% for rank & file workers;
- Stronger growth of gross domestic product (GDP) for fourth quarter 2021 of 6.9% and Consumer Price Index up 7.5% year over year.
Our take
The table shows the stark differences between the every economic metric is dramatically imcurrent environment and the last time that the Fed began to lift rates in 2015. It illustrates that nearly proved.
Fed remains extremely data dependent
The Fed remains extremely sensitive to incoming economic data, while at the same time retaining maximum flexibility. It must balance the competing risks of assisting in curbing inflationary pressures and a yield curve inversion. It must also factor in the risk of overtightening, whereby it could tighten into the natural slowdown in growth that we anticipate will be a notch lower compared to 2021.
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