During the week of December 13th, 2021, the Fed announced it would be accelerating its tapering pace to $30B/month beginning in January 2022, targeting a completion date of mid-March.
WHAT DOES THAT MEAN?
Now that the Fed’s inflation goals have been achieved to offset the impact of the global pandemic, their dual mandate also requires them to address price spikes. Their primary lever to combat inflation is increasing interest rates to discourage investment. Accelerating its tapering strategy means the Fed will buy fewer bonds in open market operations, placing upward pressure on interest rates followed by at least three interest rate hikes in 2022. With at least 75bps of rate hikes and an accelerated taper schedule, CRE assets are poised for cap rate expansion throughout 2022.
Although the Fed will accelerate its tapering schedule, and we are likely to see at least three rate hikes in 2022, the focus will turn towards the labor market and supply chains, which will be the drivers in determining Fed policy on a go-forward basis. Further, employment will dictate the number and amount of each rate hike in 2022.