The Fed is going to barging to tighten in June, and eventually arrive at a rate hike before the end of 2011, according to Deutsche Bank economists Joseph A. LaVorgna and Carl J. Riccadonna.
Their views stem from the belief that the U.S. economy is going to continue full speed in 2011, with consumer spending rising and durable goods orders remaining strong.
Here’s their timeline for Fed tightening:
- June 21st Meeting: The Fed will allow its mortgage backed security holdings to roll off its balance sheet, rather than reinvesting the proceeds in treasuries.
- August 9th Meeting: The Fed will announce reverse repurchase agreements of at least $500 billion.
- September 20th Meeting: Fed no longer includes “extended period” language in statement text.
- November 2nd Meeting: Fed moves towards “tightening bias,” adds term deposits to reverse repurchase operations.
- December 13th Meeting: Fed hikes rate paid on interest reserves to 50 bps. Essentially, this sets the key rate between 25 and 50 bps.
- Every meeting thereafter a 25 bps hike.
The key thing to remember here is this timeline assumes no disruptions to the U.S. economy before the end of 2011. While Deutsche Bank are pretty bullish, there are quite a few analysts calling on a H2 2011 U.S. slowdown. Bob Janjuah of Nomura, notably, has called for this slowdown, and another round of quantitative easing in Q3 2011.
If you’re bullish on the U.S., this may be your timeline.