Recently, we have been hearing increasing comments from the FED that rate hikes are coming, and markets are pricing in three hikes this year. The winding down of the QE program has already begun, but the FED wants to increase the pace of tightening, as inflation gets out of hand.

In November, US inflation jumped to 6.8%, while later this week, we will get the inflation report for December. Later today, Jerome Powell is testifying as well, and expectations are that he will deliver some hawkish comments too. Meanwhile, US stock markets have opened slightly bearish again today, but for the moment, the trend still remains bullish.

S&P500 Daily Chart – Can MAs Keep the Uptrend Going?

Comments by Atlanta Fed President, Raphael Bostic

• If things continue the way they are, March would be a reasonable time to start hiking rates
• Sees at least three rate hikes this year
• March is a reasonable date to start rate hikes, balance sheet runoff should begin “soon after”
• There is risk inflation, which is likely to be elevated for an extended period of time
• Fed needs to respond directly, clearly and aggressively
• A fast balance sheet runoff will be needed
• The full process of balance sheet runoff should be geared to end in “a couple of years”

This is pretty much the base case scenario for the debate about which I spoke  earlier. There wasn’t anything in Bostic’s remarks that stood out too much, so carry on as you will.

Comments by Fed’s Mester

• Would support a rate hike in March if economy remains on track
• Economy is on a really good track
• Inflation is more persistent
• Price increases have been broadening
• Says she has three hikes pencilled in
• The case is really strong to wind back accommodation
• Fed needs to recalibrate stance because inflation is above where it needs to be
• Should be able to run down the balance sheet much faster than last time
• Says she would like to set a path for the balance sheet
• It’s clear to her that inflation is too high and that the labor market is strong and that the Fed needs to take action
• It will be a challenge to keep the economy on a positive trajectory

The market is pricing in a +80% chance of a hike in March and she is on board with that.

Comments by the KC Fed President

You have to wonder why the Fed doesn’t just end QE purchases this month. Why are they tapering slowly, only to turn around and give it back in a few months?

• Will be appropriate to move earlier on the  shrinking balance sheet
• Very acommodative stance is ‘out of sync’ with the economic outlook
• Covid likely to weigh on labor force participation and prolong supply chain disruptions
• Virus surge likely to slow rotation to services spending from goods
• Own preference is to run down the balance sheet ‘earlier rather than later’

It’s all about the balance sheet from here. Bonds look like a horrible investment with the Fed working against you.