The upcoming FOMC decision was beginning to look like a placeholder ahead of the end of QE in March and a likely rate hike then but worries about inflation followed by a market rout have heightened interest in Wednesday's decision.
At one point, there was talk about ending the taper early but that's faded in part due to a comment from New York Fed President John Williams, who said it would end in March. Bill Ackman called for an immediate 50 basis point hike but with markets now in turmoil, the consensus has converged on a steady-handed Fed that will signal a March hike and little beyond that.
Goldman Sachs in a note said the "FOMC is likely to use its January meeting to hint at a March lift and to begin formulating a plan for balance sheet reduction."
They expect four hikes this year and the start of balance sheet reduction in July, which is roughly in line with the consensus.
Goldman Sachs economists say they're growing more concerned about inflation for two reasons
- Omicron is hurting the supply side, or at least prolonging the timeline to get back to normal
- Wage growth has been accelerating
"We see a risk that the FOMC will want to take some tightening action at every meeting until that picture changes. This raises the possibility of a hike or an earlier balance sheet announcement in May, and of more than four hikes this year," they write.
If there's a chance, they expect to see hikes at consecutive meetings rather than 50 bps hikes.
Looking further out, they see balance sheet reduction running at $100 billion/month, which is a significant amount of quantitative tightening and say it could come "with at most a brief ramp-up period." They say that cutting the balance sheet by about 2.4B over two years would be equivalent to a 30 bps rate hike.
h/t @priapusIQ
