Opening Statement from the February 2022 Dividend Gems
Originally published on February 20, 2022
Interest rates
Investors are now betting on up to 10 to 11 rate hikes though the end of 2023, including 4 to 6 hikes in 2022. Although these newer terminal rate estimates are in line with our own estimates which we have reiterated for more than a year (i.e. rate ceiling of not much greater than 3.00%) they are much greater than what the Fed had been planning.
To reiterate, we are in favor of a fairly aggressive hike in rates in 2021; the sooner, the better. Based on inflation and employment data, as well as growth expectations and adjusting for investor sentiment, we expect 4 to 5 rate hikes (with a bias towards 5 or 125 basis points total) in 2022 depending on the data. In a worst case scenario, we believe the Fed will raise short-term interest rates (Fed funds rate) by 150 basis points in 2022.
The Fed also discussed launching quantitative tightening (QT) at a much faster pace than the previous cycle in order to reduce its balance sheet (most likely by selling Treasuries and mortgage-backed securities). It seems possible that the Fed could begin QT by summer of 2022 although it is still unknown.
The Fed initiated quantitative easing (QE) in 2009 in response to the global financial crisis. When the Fed ended QE in 2014 its balance sheet expanded from just under $900 billion prior to the GFC to $4.5 trillion.
By December 2015, the Fed began to raise interest rates, albeit at a slow and cautious pace. But the Fed did not begin QT until late-2017. But the Fed was forced to prematurely end QT by September 2019 due to a dangerously low level of reserves which caused short-term rates to spike. Thus, during the previous QT, the Fed only managed to reduce its balance sheet by about 15%, or from $4.5 trillion to $3.8 trillion.
When the coronavirus pandemic appeared in 2020 the Fed began a very aggressive QE program which resulted in a massive expansion of its balance sheet to around $9 trillion. Because the Fed now realizes that it waited too long to begin winding down monetary stimulus, it intends to reduce its balance sheet “substantially” and much sooner after it begins raising rates than in the previous cycle.
We believe the intent of the Fed to introduce QT sooner after rate hikes begin could...
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