Brace for tighter Fed policy than we imagined: Citibank

The US Federal Reserve will likely pursue policy "tighter than what we thought was imaginable even three or four months ago", Citibank's global markets research team said in New York during a virtual briefing.

The bank expects that inflation fueled by supply chain pressures will headline challenges for central banks world over in 2022.

The Federal Reserve signaled last week that it will begin a series of interest-rate hikes in March.

US inflation is at a 40-year high and hurting buying power and household budgets.

The Fed's benchmark rate has been pegged at zero since March 2020, and consumer prices are now rising at 7 per cent.

"If inflation proves to be stubborn, which is a very significant risk, then the Fed's going to have to move more frequently," Nathan Sheets, Citibank's Global Chief Economist, told reporters at a briefing on Friday.

The definition of "more frequently" is an "open issue", Sheets said. "I think at a minimum it's fair to say every meeting is going to be live, meaning they will be considering the option of hiking rates at every meeting for the foreseeable future."

The familiar low inflation world from 10 years pre-pandemic is gone, Sheets noted. "We've moved into another world where inflation is higher, and the Fed is shifting gears."

Citibank is pointing to a more "hawkish twin" version of Fed Chair Jerome Powell from here on.

"It's almost as if J Powell at his press conference was saying: You know that chap that was up here talking to you last year, forget about him. I'm a new J Powell."

Citibank is proceeding with the view that the Fed will certainly hike rates.

Citi is pegging global growth at around 4 percent. The outlook, Sheets said, is looking sunnier for developed economies. The US, the Euro bloc and the UK are all moving at a 3.5 to 4.5 per cent pace - "substantially above their trend growth rates".

Citi's outlook for emerging markets: "Mixed", "challenging".