- Wall Street expects the Fed to raise rates more aggressively in 2022 as it fights historic inflation.
- JPMorgan and Goldman Sachs see five hikes coming this year, while Bank of America is bracing for seven.
- The increases will lead to higher rates on everything from loan payments to savings interest.
Rates on everything from home loans to savings interest are set to rise faster than experts had expected just weeks ago, according to the biggest banks on Wall Street.
The near-zero interest rates seen throughout the pandemic are on their way out. Federal Reserve Chair Jerome Powell said Wednesday that the central bank is "of a mind" to start hiking rates in March as it looks to rein in pandemic-era support and cool off inflation. But where the Fed's own December projections saw policymakers anticipating three rate hikes in 2022, Wall Street is girding for a much more aggressive fight with inflation.
By raising rates, the central bank increases borrowing costs, slows economic activity, and, indirectly, puts downward pressure on inflation. For the everyday American, the Fed's hikes translate to higher interest rates on loans, credit card payments, and savings-account interest. Those with debts to repay will face more pressure to pay up, but savers will start to earn a little more on their deposits.
Rate hikes are the Fed's best tool for clamping down on surging prices. The Fed pulled rates to historic lows at the start of the pandemic to provide key support to businesses and encourage economic activity. That aid is no longer needed, Powell said Wednesday.
The country's biggest banks now expect those hikes to come faster than previously expected, accelerating increases in borrowing costs for businesses and consumers this year. JPMorgan and Goldman Sachs analysts both raised their forecasts to five hikes in 2022 from four in the days following the Fed's Wednesday meeting. Goldman analysts led by Jan Hatzius cited strong fourth-quarter wage growth for the update, as well as Powell's hawkish messaging in his Wednesday press conference.
Bank of America took an even more hawkish turn. Economists led by Ethan Harris now see the Fed raising rates at every one of its seven remaining policy meetings in 2022. Powell "made a compelling case" that the central bank should've started its hikes in 2021, and the Fed will likely speed up its tightening to ensure inflation comes down to earth, the team said.
"When you are behind in a race you don't take water breaks," they added.
The pivot to a faster hiking cycle comes amid the most intense inflation in four decades. The core Personal Consumption Expenditures price index – the Fed's preferred inflation measure – soared 4.9% year-over-year in December, the Commerce Department announced Friday. That's the fastest pace since 1983 and an acceleration from the 4.7% rate seen in November.
It's not just a faster rate-hike schedule that banks are bracing for. While the Fed usually increases its benchmark rate a quarter-percent at a time, some on Wall Street are predicting an increase twice that size at the next Fed meeting, marking an aggressive move to tighten monetary conditions. Nomura Holdings expects the central bank to issue a half-percent increase in March.
Such a large hike – which the Fed hasn't used since 2000 – is "on the table" for the upcoming meetings, Raphael Bostic, president of the Federal Reserve Bank of Atlanta, told the Financial Times in a Friday interview. Bostic held to his forecast that the central bank will hike rates only three times through the year, but noted that the Fed is keeping its options open in case inflation proves more resilient than anticipated.
Americans might have mere weeks left to enjoy the record-low rates of the past 22 months. The Fed's war with inflation is about to escalate, and borrowing is poised to get pricier and pricier.