3 Rate Hikes For 2022; Stock Market Rises

The Federal Reserve said Wednesday that it will halt crisis-driven asset purchases early next year, setting the stage for three interest-rate hikes in 2022 to help counter the threat of persistently high inflation.

The stock market, which was lower as investors braced for Fed meeting news, improved, with the Dow Jones and S&P 500 turning positive. Fed chief Jerome Powell will elaborate on the policy outlook at his 2:30 p.m. ET news conference.

On Wednesday, the Fed elected to speed up its exit from the extraordinary policies it adopted early in the pandemic. Asset purchases will now decrease by USD 30 billion per month and likely come to an end in March.

That timing is significant because the Fed has long signaled it would hold its key interest rate steady until after it halts its nonconventional balance-sheet expansion. That means interest-rate hikes could be on the table as early as March.

Quarterly Fed economic projections showed that 12 policy committee members, out of a total 18, think conditions will warrant at least 3 quarter-point rate hikes in 2022. That is quite a shift from September’s projections. At the time, nine of 18 Federal Reserve policymakers thought it would make sense to wait until 2023 for the cycle’s first rate hike.

In addition, a majority of 11 policymakers anticipate 3 further rate hikes in 2023. That would lift the Fed’s benchmark overnight lending rate to a range of 1.5%-1.75% vs the current 0%-0.25% range.

After the Fed meeting policy news, the stock market initially weakened, but then improved. The Dow Jones industrial average turned fractionally higher, while the S&P 500 added 0.2%. The Nasdaq composite, which has had a lousy week as investors weigh the implications of a more aggressive Fed, erased losses.

Though Fed policy signals were much more hawkish than in September, they were still somewhat more aggressive than stock market investors were expecting. After the Fed policy news, the 10-year Treasury yield held near 1.45%, not far off 12-week lows.

Ahead of the Fed meeting decision, CME Group showed 62% odds of three Fed rate hikes by December 2022. Recent Fed hawkishness has pushed up short-term Treasury yields, while long-term Treasury yields have eased back. That suggests investors see a risk of the Fed acting too aggressively, which will have longer-term disinflationary effects.