Bank of Singapore (BoS)’s chief economist Mansoor Mohi-uddin expects the upcoming Federal Open Market Committee (FOMC) meeting on March 15 to March 16 (US time) to be hawkish despite any outlook risks from the Russia-Ukraine conflict.
According to Mohi-uddin, the predicted hawkish stance comes as US inflation is already at 5.0%.
“Core inflation has reached 40-year highs due to the strength of America’s recovery from the pandemic. This has led to the US economy returning quickly to full employment,” he writes in his March 14 report.
“Thus, faced with troubling inflation, low unemployment, surging energy prices and rising inflation expectations, we expect the Fed will tighten monetary policy steadily through five rate hikes in 2022 despite the uncertainty caused by the war,” he adds.
To be sure, Mohi-uddin thinks the FOMC will raise the fed funds interest rate from 0% to 0.25% by 25 basis points (bps) and not rule out 50 bps hikes. This is given that inflation is far above the Fed’s 2% goal, he adds.
In his report, the economist also expects the Fed to trim its median forecast for GDP growth in 2022 from 4.0% given that the US is less dependent on energy imports. That said, the Fed is likely to revise its estimate for core inflation up sharply from 2.7% to around 4.0% for the end of 2022, he says.
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In addition, Mohi-uddin sees the Fed as likely to lift its interest rate forecasts as a result of its higher inflation estimates to five 25bps rate hikes in 2022, followed by four in 2023 and another one-to-two in 2024. “[This implies that] the fed funds rate may end as high as 3.0% during the central bank’s upcoming tightening cycle,” he writes.
Furthermore, the Fed may give more details on its plans to “start unwinding its pandemic quantitative easing (QE) and thus signal the Fed start from as early as May to shrink its balance sheet to counter inflation by tightening financial conditions through higher bond yields”.
To this end, the Fed’s stance is “thus likely to strengthen the USD and push US yields higher,” writes Mohi-uddin.
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“We see the greenback as high as 1.05 against the EUR this year and 10-year Treasury yields to reach 2.35% over the next 12 months,” he adds.
Photo: Bloomberg
