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April 2022

Fed Turns More Hawkish

The Fed is trying to slow the pace of economic growth


Fed ramps up interest rate hikes


The Fed is expected to reduce the size of its bond portfolio

Over the past month, there has been a massive shift in expectations of how fast the Fed will raise interest rates this year.

Each quarter the Fed updates its forecast of what the federal funds rate will be at the end of each calendar year. Back in December, the Fed expected the funds rate to end 2022 at 0.9%, implying three hikes of 25 basis points each over this year. But at its March meeting, the Fed ramped up its forecast by projecting that the funds rate will be 1.9% by the end of the year, which implies seven hikes of 25 basis points. It’s also possible that the Fed will raise the funds rate in 50 basis-point increments.

In addition to this, the Fed is making plans to reduce the size of its bond portfolio. During the pandemic, the Fed purchased Treasury and mortgage bonds to help push down intermediate- and longer-term interest rates. That plan worked well, as homeowners had the opportunity to refinance some of their debt or acquire more debt at a lower interest rate. But that is no longer needed. So the Fed stopped buying bonds in March, and at its next meeting in May is expected to announce plans for allowing some of those bonds to mature without reinvesting the proceeds. This should put some upward pressure on bond yields for the following year or so.

All of this is part of the Fed’s plan to slow down the pace of economic growth. The economy is expanding at a fast clip. Last year, GDP was up 5.7%, the most rapid yearly pace in almost 40 years (see GDP chart). By slowing down the economic growth rate, inflationary pressure should also subside, helping to bring inflation back toward the Fed’s goal of 2.0%. However, it will take time to accomplish those objectives. The Fed does not think it will get the inflation rate near its goal of 2.0% until late 2023.

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