Fed speeds up tapering process, Bank of England raises rates
On the latest edition of Market Week in Review, Investment Strategist Alex Cousley and Head of AIS Portfolio & Business Consulting, Sophie Antal-Gilbert, discussed recent announcements from the U.S. Federal Reserve (Fed) and the Bank of England (BoE). They also reviewed the latest monetary and fiscal policy developments from China amid the country’s slowdown in growth.
Fed accelerates tapering, projects three rate hikes in 2022
The Fed wrapped up its final policy meeting of the year on Dec. 15 by announcing it will accelerate the unwinding of its quantitative easing (QE) program in January, Cousley said. “Starting next month, the U.S. central bank will taper its bond purchases by $30 billion—instead of $15 billion—which puts the entire QE program on track to end in March, instead of June,” he explained. An earlier conclusion to QE gives the Fed more room to increase interest rates in 2022, Cousley added.
Importantly, the central bank’s so-called dot plot, which indicates where each Federal Open Market Committee (FOMC) member thinks interest rates should be over the next few years, showed that a majority of members foresee three rates hikes in 2022, he said. “This view is reflective of the central bank’s inflation forecasts, which were adjusted substantially upward at the meeting,” Cousley explained.
He noted that the market’s reaction to the Fed announcement was fairly interesting, with the tech sector initially helping fuel a powerful rally in equities in the wake of the meeting. However, the following day, Dec. 16, was marked by heavy selling in tech names, Cousley said. These up-and-down movements show that the market is probably still digesting how it thinks the Fed will act next year, he remarked, adding that he believes the central bank may raise rates fewer times than the market currently expects.
“There’s still quite a bit of spare capacity in the U.S. labor market, and policymakers will also have to keep a close eye on the omicron variant of COVID-19. Given the status of the labor-market recovery and the risks that omicron presents, I believe that the 2022 rate profile from the Fed may turn out to be slower than either the central bank or markets think,” Cousley stated.
Bank of England hikes rates by 15 basis points
Shifting to the UK, Cousley said that the Bank of England surprised markets once again, this time by opting to raise rates by 15 basis points at its Dec. 16 policy meeting. “This follows the BoE’s unexpected decision to forego rate increases at its November meeting, amid widespread expectations for a hike,” he noted. This time around, markets weren’t expecting the central bank to raise borrowing costs, due to the UK’s ongoing surge in COVID-19 infections caused by the omicron variant, Cousley said.
So, why did the BoE move ahead with a December rate hike? From his vantage point, the decision probably has a lot to do with the tightness of the UK labor market, Cousley said. The situation has been exacerbated by Brexit and the constraints it places on the nation’s labor supply, he added.
Looking ahead, Cousley noted that markets are pricing in three rate hikes by the BoE in 2022. “This seems a bit on the aggressive side to me, but the BoE does have a fairly strict inflation target of 2% to meet,” he said, noting that UK inflation topped 5% in November on a year-over-year basis.
Are more policy changes coming to China?
Cousley and Gilbert wrapped up the year’s final installment of Market Week in Review with a look at the latest economic data from China, which Cousley said continues to run on the softer side. Recently released numbers pertaining to credit, industrial production, retail sales and fixed-asset investments were all unimpressive, he explained. In addition, the country’s property-market slowdown will likely continue to be a drag on economic growth through 2022, Cousley noted.
In response, the Chinese government has unveiled some monetary policy changes, including a recent 50-basis-point cut in the reserve ratio requirement for banks, he said—a development Cousley characterized as encouraging. In addition, he believes that the People’s Bank of China (PBOC) will probably announce an interest-rate cut as well.
In order for the country to mitigate the risks of a hard landing, Cousley also expects Chinese fiscal policy to become more accommodative in 2022. “China hosts the Winter Olympics in February and will hold its 20th National Congress near the end of 2022. Amid this backdrop, I believe the country wants to see stable growth next year—and is moving toward a soft landing,” he concluded.
Editor’s note: Market Week in Review will resume on Friday, Jan. 7.