Weekly Economic & Financial Commentary: The Hawks in Full Control at the Fed

Summary

United States: Moderating Growth and a More Aggressive Fed

• The economy had the wind at its back in 2021 with generous fiscal policy and an accommodative Fed. Inflation and supply chains were the key obstacles. In light of a more hawkish stance at this week’s FOMC meeting, we now expect the Fed to hike rates 125 bps this year and that a balance sheet reduction will be announced at the July 27 FOMC meeting.
• That said, our updated forecast is more about base effects from the Q4 GDP report rather than a major change in our outlook due to a more aggressive Fed. We’ll provide a more full-fledged forecast update in our U.S. Monthly after we get January’s nonfarm payroll release.
• Next week: Construction Spending (Tues), ISM Manuf. & Services (Tues/Thurs), Employment (Fri)

International: European Economic Growth Sputters Around the Turn of the Year

• This week’s news from Europe offered further confirmation of an economic soft patch. The Eurozone January services PMI fell more than expected, while Germany saw GDP contract in Q4. In the U.K., the manufacturing and services PMIs fell further in January. Elsewhere, the Bank of Canada held its policy rate steady this week, but signaled that rate hikes would be coming soon.
• Next week: Eurozone CPI (Wed), Brazil Selic Rate (Wed), BoE Policy Announcement (Thu)

Interest Rate Watch: The Hawks in Full Control at the Fed

• We forecast that the FOMC will raise its target range for FFR 125 bps between March and the end of the year. We continue to expect the Committee to raise rates 75 bps more over the course of 2023 with 25 bp rate hikes in the first, second and third quarters of the year.

Credit Market Insights: Consumers Are on a Spending Spree, Can It Last?

• Major players in the credit card business reported attractive Q4-21 earnings this week. But the revival in credit card spending conflicts with a time when consumers wallets are feeling a little lighter, as inflation and dwindling stimulus encroach on real income. Is such growth sustainable, or are consumers biting off more than they can chew when it comes to taking on credit card debt?

Topic of the Week: Build Back Better Still Stuck in Neutral

• A little over a month ago, we published a report that made the case that Democrats’ efforts to pass their Build Back Better plan largely had stalled. One month into 2022 and not much has changed.

Full report here.