Fed “QT” could include outright asset sales this time

As hinted at in the December FOMC minutes, we expect the Fed will begin shrinking its balance sheet later in 2022. They would start by allowing maturing assets to run off, but if longer-term bond yields were to remain unusually low, we expect officials would go further and begin actively selling some holdings particularly at the long end, in what would amount to a reverse “Operation Twist”.
Michael Pearce Senior US Economist
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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

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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US Data Response

International Trade (Nov.)

The sharp rebound in the trade deficit in November means that net trade is now on track to be a small drag on economic growth in the fourth quarter, rather than a small boost as we had previously assumed. Partly as a result, we now expect GDP growth was a slightly less impressive 4.5% annualised in the fourth quarter, down from our previous estimate of 6.5%.

6 January 2022

US Employment Report Preview

Payroll growth slowing ahead of Omicron hit

The chaos caused by the rapid spread of the Omicron variant came too late to have much effect on December payrolls, which we estimate increased by a healthy 350,000. But the huge numbers of people being told to isolate could drive a significant drop in payrolls in January.

4 January 2022

US Data Response

Industrial Production (Nov.)

The solid 0.7% increase in manufacturing output last month suggests that shortages are gradually easing. With demand still strong, the latest surveys are still consistent with manufacturing output expanding at a near-5% annualised pace in the coming months. Note: Central Bank Drop-In – The Fed, ECB and BoE are just some of the key central bank decisions expected in this packed week of meetings. Neil Shearing and a special panel of our chief economists will sift through the outcomes on Thursday, 16th December at 11:00 ET/16:00 GMT and discuss the monetary policy outlook for 2022.

16 December 2021
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