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Prompted by recent developments, of which the most important was
a revised outlook for inflation that includes a more gradual
reversal of the current spike of inflation and correspondingly
increased risk that long-run inflation expectations might rise
above the Fed's longer-run 2% target, IHS Markit has updated our
monetary policy outlook. We now expect the Fed to begin increasing
interest rates and end bond purchases earlier. Additionally, we
expect the Fed will return to an approximately neutral stance of
interest-rate policy faster, albeit still gradually.
Taper of asset purchases
We anticipate the Fed will begin to reduce the pace of asset
purchases next month, lowering them gradually to zero by next June.
(This could be accomplished with regular planned declines in the
pace of purchases of $15 billion per month.) The start of the taper
is unchanged from prior forecasts, but we now assume an earlier end
to such purchases (June 2022 instead of October 2022). The Fed's
securities portfolio is projected to rise to $8.5 trillion,
approximately $200 billion less than previously assumed.
Interest-rate policy
We anticipate the Fed will implement the first increase in the
target for the federal funds rate from its current range of 0% to
0.25% in March 2023, six months earlier than our prior forecast.
Furthermore, we accelerated the pace of rate hikes after the
initial lift-off. The nominal federal funds rate target is assumed
to rise to an approximately neutral setting (a range of 2.5% to
2.75%) in 2027, one year earlier than previously anticipated.
Inflation expectations
We continue to anticipate that the current spike of inflation
will prove to be mostly transitory. However, more persistent
supply-chain bottlenecks suggest that some pandemic-related price
increases could prove to be more persistent than previously
anticipated. In addition, the substantial surge in house prices has
resulted in a large increase in the ratio of house prices to rents.
We assume some easing in house price inflation, to be sure, but a
narrowing of the gap between rents and house prices is expected due
to a firming of rent inflation.
Our assumptions still reflect a cautious and gradual shrinkage
of the extraordinary monetary policy accommodation that was
engineered last year by the Federal Reserve. Seven years will have
elapsed from the time of the pandemic-related policy interventions
in March 2020 and a return to an approximately neutral stance for
interest-rate policy. The Fed's securities portfolio will stop
expanding in mid-2022, only a little more than two years after the
pandemic-related interventions, but the possibility of any
reduction in the nominal size of that portfolio is still some years
in the future.
Posted 13 October 2021 by Chris Varvares, Vice President and co-head of US Economics, S&P Global Market Intelligence and
Ken Matheny, Executive Director, Research Advisory Specialty Solutions, S&P Global Market Intelligence
