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How far will ‘Powell’s new hawkish tilt’ go? Here’s what investors will be looking for from the Fed’s meeting this week

Investors will be focusing their attention on the Federal Reserve’s meeting this week, searching for details on a potentially hawkish pivot in monetary policy in the face of high inflation.

Fed Chairman Jerome Powell — whose hawkish signal during his testimony before the Senate Banking Committee at the end of November rattled markets — will hold his usual news conference Wednesday after the conclusion of the central bank’s two-day policy meeting. 

“This meeting is really about seeing how far Powell’s new hawkish tilt will go,” James McCann, deputy chief economist at abrdn, said in emailed comments last week. “We expect the Fed to announce a faster pace of tapering, which will act as the main signal that the central bank’s tolerance for surging inflation has been exhausted.”

U.S. inflation rose again in November, increasing the annual rate to 6.8%, the highest in nearly 40 years, according to consumer-price index data released Friday by the Labor Department. That’s the highest pace of inflation since 1982, when Ronald Reagan was U.S. president.

Read: Highest U.S. inflation in nearly 40 years will force Federal Reserve’s hand

“The Fed is running out of time,” said Tom Graff, head of fixed income at Brown Advisory, in a phone interview. “These inflation reads need to show a clear deceleration, or they’re going to wind up hiking as soon as the tapering is over.” Graff said he expects the Fed may raise its benchmark interest rate three times next year, potentially beginning as soon as April.

The central bank will “probably double the pace” of tapering its monthly bond purchases, said Liz Ann Sonders, chief investment strategist at Charles Schwab, in a phone interview. That means tapering would end in March instead of June, she said.

The pace of increase in interest rates will be important to the stock market as it tends to fare better in a slower tightening cycle, according to Sonders. 

A slower pace might mean the Fed raises rates many times in a cycle but, say, every other policy meeting, she said. Sonders said markets have priced in about three rate hikes for 2022, which is above the two that she’s expecting — at least at this stage. 

This week investors will get a view of the so-called dot plot showing rate-hike projections made by members of the Federal Open Market Committee, after the Fed’s two-day policy meeting concludes on Wednesday.

The “updated dot plot will likely reveal a pull forward in the dots, with a median trajectory of two hikes in 2022, and three hikes in both 2023 and 2024,” wrote Bank of America economists in a BofA Global Research note Friday. “That said, Chair Powell may be noncommittal about the timing and point to omicron uncertainty.”

The stock market became jittery after the new omicron variant of the coronavirus emerged, fearing it could hurt the economic recovery during the COVID-19 pandemic. Early this month, the Associated Press reported that multiple cases of omicron have been detected in New York.

But on Friday, stock-market investors appeared to have shaken off concerns over omicron and surging inflation. All three major benchmarks closed higher to score gains for the week, with the S&P 500 index SPX finishing at a fresh peak.

In the bond market, the yield on the 10-year Treasury note BX:TMUBMUSD10Y was little changed Friday at 1.487%, but its rise of 14.5 basis points for the week marked its largest weekly gain since February based on 3 p.m. levels, according to Dow Jones Market Data. Treasury yields and prices move in opposite directions. 

The 10-year Treasury yield was trading down Monday morning at around 1.44%, according to FactSet data. U.S. stock benchmarks were also lower in Monday morning trading, with the S&P 500 slipping 0.4%.

See: Traders raise expectations for accelerated rate hikes by Federal Reserve after Powell speaks, flattening Treasury curve even further

“Strong economic growth, labor market recovery and elevated inflation has clearly moved the Fed toward an accelerated focus on shifting policy and particularly in getting quantitative easing over with,” said Rick Rieder, BlackRock’s chief investment officer of global fixed income and head of the asset manager’s global allocation investment team, in an emailed note Friday.

“That shift is long overdue, and clearly it will also provide the Fed with much needed optionality for moving interest rates higher relative to what is likely to be persistently high levels of demand and still strong inflation prints in the first few months of next year,” Rieder said. 

Later next year, inflation may start to fall, according to some analysts. While “sticky inflation” remains a risk, the easing of supply-chain constraints by the end of March should help “slowly” bring the rise in the cost of living down to “more comfortable levels,” Rieder wrote.

“Headline and core CPI are likely to be in the 2% to 3% range by the end of 2022,” he said, referring to the consumer-price index. Core CPI omits volatile food and energy costs.

Barry Gilbert, asset allocation strategist for LPL Financial, also expects inflation over the next year to fall “decisively lower,” according to an emailed note Friday. “We see a first quarter peak in inflation, Fed bond purchases to end in March/April, and liftoff potentially in September 2022,” he said in the note.

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