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US Economics Update

Fed lines up March rate hike

The Fed’s announcement that it will “soon be appropriate” to raise interest rates and the numerous hints dropped by Chair Jerome Powell in the post-meeting press conference all but guarantee that a March rate hike is coming. Meanwhile, the Fed set out a brief outline of how it will run down its balance sheet, but with any decision still “a couple of meetings” away, that process won’t get underway until mid-year.

26 January 2022

US Chart Book

Omicron impact short-lived

The surge in Omicron infections means more people were self-isolating in early-January than at any time since the beginning of the pandemic, although the impact that will have on employment and output remains uncertain. Furthermore, with cases now falling just as quickly as they rose, any effects will be quickly reversed in February. In contrast to earlier waves, the rise in infections hasn’t prompted as big a pullback in services activity, with fears of catching the virus lower than during previous waves. The far bigger factor this time is staff absenteeism, which we think will cause both payroll employment and manufacturing output to decline in January, although the impact should be mostly reversed by the end of the first quarter.

24 January 2022

US Economics Weekly

Omicron reaches plateau, leaving Fed free to hike

We expect the Fed to deliver some heavy hints at next week’s FOMC that it is planning an interest rate hike in March. With the Omicron wave now past its peak nationally, there is little to hold the Fed back, particularly if next week brings news of a further acceleration in wage growth.

21 January 2022

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Key Forecasts

Main Economic & Market Forecasts

%q/q ann. (%y/y) unless stated

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Q4 2022

2021

2022

2023

GDP

+2.3

+4.0

+1.5

+2.4

+2.5

+2.3

(+5.6)

(+2.7)

(+2.0)

CPI Inflation

(+5.3)

(+6.7)

(+6.8)

(+4.8)

(+3.3)

(+2.2)

(+4.7)

(+4.3)

(+2.6)

Core CPI Inflation

(+4.1)

(+5.0)

(+6.0)

(+4.5)

(+3.6)

(+3.2)

(+3.6)

(+4.3)

(+2.9)

Unemp. Rate (%), Period Ave.

5.1

4.2

3.9

3.7

3.6

3.4

5.4

3.6

3.1

Fed Funds Rate, End Period (%)

0.00-0.25

0.00-0.25

0.25-0.50

0.50-0.75

0.75-1.00

1.00-1.25

0.00-0.25

1.00-1.25

2.00-2.25

10y Treas. Yld., End Period (%)

1.52

1.51

1.75

1.90

2.10

2.25

1.51

2.25

2.75

S&P 500, End Period

4308

4766

4750

4800

4850

4900

4766

4900

5150

$/€, End Period

1.16

1.14

1.12

1.10

1.09

1.08

1.14

1.08

1.05

¥/$, End Period

111

115

116

117

119

120

115

120

122

Sources: Refinitiv, Capital Economics

Omicron reaches plateau, leaving Fed free to hike

US Economics Weekly

26 January 2022

Our view

Although we expect inflation to fall back in the first half of 2022, as energy prices drop back and supply shortages ease, we believe that rising cyclical pressures will prevent core inflation from falling back below the Fed’s 2% target. As a result, following three interest hikes next year, we expect the Fed to hike rates an additional four times in 2023, with the fed funds rate peaking at more than 2% in 2024. After a 5.8% gain in 2021, we expect GDP to increase by a more modest 3.0% in 2022, with the tightening in financial conditions meaning that growth is likely to slow to only 2.0% in 2023.

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US Economic Outlook

Inflation to remain elevated as GDP growth slows

We expect underlying inflation to remain well above the 2% target this year, which means the Fed will push ahead with four rate hikes even though real GDP growth is likely to disappoint. Core inflation will average 4.3% in 2022 and close to 3.0% in 2023. GDP growth will slow to 2.7% this year and 2.0% in 2023.

20 January 2022
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