Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.
It’s only fitting that the NCAA Tournament kicked off last week, as March Madness in the markets continues. Last week, equity markets rallied sharply, enjoying their best weekly gains, with the S&P500 rising over 5%, despite ongoing geopolitical uncertainty and an aggressive policy announcement by the Fed. Even with several market-moving catalysts, all eyes were on Fed Chair Powell last week as the Fed delivered its first rate hike since 2018, a well-telegraphed 25bp rate hike.
The Fed has started a new monetary policy cycle and declared war on inflation. They expect the Fed Funds rate to be around 2.5% when completed. After the March hike, the Fed expects six more moves in 2022, with the potential for even more aggressive policy if necessary. The Fed’s goal is now to curb demand. In his commentary, Powell said that if the Fed knew then what it knows now, “it would have been appropriate to move earlier.” Furthermore, Powell commented that the goal was to “get rates back up to more neutral levels as fast as [they] practically [could] and then move beyond that if that turned out to be appropriate.”
If it wasn’t clear already, the Fed has acknowledged that they’re well behind the curve on inflation. They’re going to fix it, likely by entering restrictive territory with rates above the neutral level.
In our view, the Fed has transitioned to take inflation seriously. They are switching monetary policy toward a restrictive mode and ending the decades-long era of policies aimed at raising inflation. The question now becomes how we’ll see the Fed reduce its balance sheet and whether their stated actions will be enough to curb inflation after several years of stimulus.
We will hear from several FOMC participants this week, and the calendar of economic data releases will be relatively light. The focus on Fed speaker comments will be on - perceived support for a 50bp rate hike at some point this year and details of the Fed’s balance sheet run-off. As Powell commented last week, balance sheet run-off “might be equivalent to another rate hike.”
Data deck for March 19–March 25: