Stocks slip as Fed raises projections for rate hikes in 2022 and 2023

Central bankers in the US nudged up their individual projections for short-term interest rates in 2022 and 2023 at their two-day policy meeting, although they didn't actually discuss potential dates for the so-called 'lift-off' in rates.

Before Wednesday's meeting, economists at Barclays Research had told clients that whether Federal Reserve officials now expected a first interest rate hike to arrive in 2023 was a "close call", although they did expect that to be the case.

That did indeed turn out to be the case, with the median projection of participants on the Federal Open Market Committee, the Fed's main policy-making body, now being for two hikes in 2023.

Furthermore, while no interest rate hikes were expected in 2021, a few more FOMC participants than at March's policy meeting now also expected hikes in 2022 while many more now saw hikes arriving in 2023.

As well, the highest projection for the Fed funds rate in 2023 was now at 1.6%, versus 1.1% in March, when policy-makers last published their projections for rates.

Nevertheless, in its policy statement, the FOMC reiterated that higher inflation was largely the result of "transitory factors" while economic activity and employment had strengthened.

The initial reaction in stock markets was negative, with the S&P 500 trading lower by 0.88% to 4,209.29 and the Nasdaq Composite falling 0.95% to 13,938.50.

Yields on benchmark 10-year US Treasury notes were five basis points higher alongside to 1.54%.

Euro/dollar was down 0.92% to 1.2015.

Significantly, at his post-meeting press conference, Fed chairman, Jerome Powell, stressed that the FOMC participants' projections were only their personal projections.

In fact, there had been no discussion at the FOMC on Wednesday regarding possible "lift-off" dates because it would not make any sense given the "highly uncertain" context.

Powell also reminded his audience about the need to remain "humble about one's ability to understand the data".

Responding to one journalist's questions, Powell also differentiated between inflationary pressures linked to the reopening of the economy as opposed to price increases resulting from "tight resource utilisation".

At present, he argued, we were seeing the former.

Commenting on the latest FOMC decision, Hinesh Patel, portfolio manager at Quilter Investors, said: "Price growth will be tolerated for the time being, given it is widely expected to be transitory in nature. But the signs are there that policy withdrawal is on the cards.

"It's good to see the Fed acknowledging the need to discuss what a tapering would look like – but as we know from history this can be a messy process for financial markets in the short-term."

For his part, Ian Shepherdson, chief economist at Pantheon Macroeconomics, chipped in saying: "The majority of FOMC members still appear to think that the ending of the reopening spike, and a rebound in labor supply, will bring inflation close enough to the target to require no action, so it’s hard to see why a majority then thinks rates will have to rise in 2023 just to keep it there.

"We still think the Fed will have to start hiking in 2022, for the record."