American credit will experience drag as inflation forces a monetary response. The US Federal Reserve announced it will double the rate it tapers its bond-buying next month. RBC economist Josh Nye has forecast the program will now end as early as March at this pace. This would be months ahead of schedule, with RBC seeing a faster taper leading to earlier hikes to interest rates.
The US Federal Reserve Is Tapering Faster Than Expected
The Fed held rates but will double the speed it tapers its bond-buying, a sign easy credit will come to an end. The Fed will lower its Treasury purchases by another US$20 billion next month. Mortgage backed securities purchases will also fall by US$10 billion. At this pace, the program should be over by mid-March. Before this announcement, RBC didn’t see the program ending until mid-2022.
Elevated inflation is the primary reason the central bank is easing on the cheap money. In October, consumer inflation reached 5% — way higher than the 2% sought. It’s more than double the target inflation rate, which is a good reason to ease the gas.
US Federal Reserve “Dot Plot”
Source: US Federal Reserve.
The Fed’s “Dot Plot” Shows 3 Rate Hikes Are Likely
The Fed’s “dot plot” shows three rate hikes are what’s generally expected next year. The dot plot is exactly what it sounds like — the FOMC members plot a dot to show how high they think rates will rise. Each dot is presented together, and analysts use the distribution to see where the committee is concentrated. This helps the market adjust to future expectations ahead of the Fed actually making a decision.
Ending bond purchases in March and 3 rate hikes next year is more than the market expected. This week is the second surprise from the Fed in two months, which began tapering last month. As a result of the hawkish tone, RBC sees the fed making its first rate hike as early as Q2 2022. That would be one quarter before a hike was previously expected.
“The Fed going beyond market pricing is notable in the context of rate hike expectations in other jurisdictions that continue to run well ahead of central bank guidance,” said Nye.