The era of near zero interest rates appears to be nearing an end. Despite emergent geopolitical risks stemming from Russia’s invasion of Ukraine, mounting inflation now has the Fed’s full attention. During January, the Consumer Price Index (CPI) leaped 7.5% year-over-year, marking the largest annual jump in just under 40 years. Broadening price pressures have arrived against a backdrop of tangled supply chains and robust consumer demand, fueled in large part by accommodative fiscal and monetary policies over the past two years meant to help offset the pandemic recession. More recently, tightening labor markets have fueled rapid growth in wages and incomes, fanning the flames of inflation even further.
The intensity and persistence of inflation have prompted a hawkish pivot from the Federal Reserve. Perhaps the most notable recent change in our macroeconomic outlook is we now expect the Fed to raise the federal funds rate five times in 2022, bringing the current target range of 0.0%-0.25% up to 1.25%-1.50% at the end of this year. We also look for the Fed to begin to gradually shrink its balance sheet later this year. The result of these actions, as well as the expectation for higher inflation and strong economic growth moving forward, will be modestly higher interest rates across the board. While the uncertainty brought on by the crisis in Ukraine has brought longer-term rates lower in recent days, yields on the 2-year, 10-year and 30-year Treasuries are hovering at levels not experienced since before the pandemic.
*Article courtesy of Wells Fargo
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