How Many Fed Rate Hikes Will There Be in 2022?

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Jan. 24 2022, Published 12:28 p.m. ET

Stock markets globally have been under pressure in 2022 amid fears of a Fed rate hike. In 2021, the Fed announced tapering and said that it would lower its monthly bond purchases. The tapering would end in this quarter and then it's expected to raise rates. How many Fed rate hikes will there be in 2022?

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The Fed slashed rates to zero bound in March 2020 in what was unprecedented monetary policy easing amid the COVID-19 pandemic. The accommodative monetary policy helped propel all risk assets including stocks, cryptos, and commodities higher.

The Fed stayed put despite rising inflation.

U.S. inflation rose steeply in 2021 and touched 7 percent in December. However, the Fed maintained that the price rise was transitory and driven by supply-side issues and the demand boost. As 2021 drew to a close, Fed Chair Jerome Powell said that the controversial “transitory” reference had lived its course.

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U.S. inflation rose a lot more sharply than what the Fed envisioned. In 2020, the Fed said that it didn't expect inflation to rise above 2 percent by 2023. The Fed also changed its approach and shifted to average inflation targeting and said that it would let inflation run above 2 percent for some time until it averages 2 percent.

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In 2020, the Fed signaled that a rate hike wasn't coming until at least 2023. However, things changed in 2021 as a booming economy and rising commodity and labor costs pushed U.S. inflation to a multi-decade high.

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The Fed’s dot plot calls for three rate hikes in 2022.

The so-called dot plot after the Fed’s December meeting showed that 12 of the 18 FOMC members expect three rate hikes in 2022. Five members predicted two rate hikes, while only one member expected one rate hike in 2022.

Some analysts think that the Fed might have to raise rates more than three times in 2022 to tame inflation. Goldman Sachs thinks that the Fed might raise rates four times in 2022.

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The Fed could raise rates multiple times in 2022.

Bank of America’s chief investment strategist Michael Hartnett thinks that the Fed might have to raise rates as many as six times in 2022 if it's serious about containing inflation. He has predicted that by the end of 2022, the Fed fund rates will be 3 percent.

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That isn't the consensus forecast though. The stock markets seem to believe that the Fed’s tightening will be a lot more severe than what the December dot plot reveals. The sell-off in growth stocks is a testimony to the fact that markets believe that the Fed will increase rates more than three times in 2022.

When will the Fed start increasing interest rates?

There's a near consensus that the first rate hike will come in March, which would be the first Fed meeting after ending the tapering. Previously, the Fed said that it would only increase rates after ending its bond-buying program.

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Growth names, especially those that are posting losses or had high valuations, have been under severe pressure. Nowhere is the pain more evident than in Cathie Wood’s flagship ARK Innovation ETF (ARKK), which is now down almost 58 percent from the 52-week highs.

Wood has been buying more of the stocks where she has conviction. Catching these falling knives hasn’t worked so far. Along with these stocks, ARKK has also continued to plummet.

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