FX Spotlight 16 Dec 2021 | FOMC reaction – poised for action | Article – HSBC VisionGo
- A more hawkish message delivered as FOMC projects three 25bp rate hikes in 2022, plus three more in 2023
- Tapering on track to conclude in March 2022
- USD only temporarily lifted after recent rally
The December FOMC prompted an initially stronger USD
The December Federal Open Market Committee (FOMC) was undoubtedly a hawkish step relative to November’s, and prompted an initially stronger USD in response to the policy announcement and accompanying statement. The direction of the changes made was anticipated following the hawkish shift in Federal Reserve (Fed) guidance during November, notably around a likely acceleration in the pace of tapering. But the new “dots” rate projections were higher than expected by the consensus and, together with the alterations to the FOMC’s forward guidance on policy rates, point to a Fed that may become more activist on the rate front in the coming quarters.
A doubling of the taper pace was announced by the FOMC
On tapering, the FOMC announced a doubling of the taper pace to USD30bn per month. This was in line with Bloomberg’s survey of expectations where only 6% expected no acceleration to be announced, and the majority were clustered around a USD30bn pace. Fed rhetoric in the run-up to the meeting, notably Chair Powell’s testimony to Congress in late November, had helped to ensure this step was unsurprising.
The “dots” projection moved higher - more aggressive than expected by consensus
The “dots” projections moved notably higher relative to September’s profile. The median dot for 2022 now incorporates three 25bp hikes, while 2023 pencils in an additional three increases. The new profile is somewhat more aggressive than the one anticipated by the consensus, which strongly favoured two hikes in 2022, and narrowly favoured three hikes over two for 2023. This perhaps spurred the initial USD pop higher, but the scale of the “surprise” proved insufficient to sustain the rally, it seems.
Inflation tests to raise rates have been met but further gains required in the labour market
The accompanying statement echoed the alterations to the taper, the dots and the economic forecasts. The earlier reference to “transitory” inflationary forces was dropped, as Chair Powell had flagged in his late November testimony. There was a change to the Fed’s forward guidance tests, effectively acknowledging that the inflation element for raising rates had been met, but that further gains will be required in the labour market. This shift is consistent with the speedier move to rate hikes fostered by the new taper pace and dots projections.
A material USD rally may not result from the meeting
We continue to look for gradual USD strength through 2022e
Overall, however, while somewhat more hawkish than expected, there was clearly not enough drama to warrant a material extension of the USD rally, which had accelerated during November courtesy of the hawkish Fed guidance. The December FOMC has delivered on that guidance but was not quite enough to push the USD index (DXY) through the November year-to-date high. That failure provoked a reversal and the USD has settled into the middle of its December range. We continue to look for gradual USD strength ahead through 2022e, supported by the Fed’s ongoing move to the exit from accommodative monetary policy.