Federal Reserve Expected to Offer Clues on Timing of Stimulus Reduction

Federal Reserve Updates

Federal Reserve officials are expected to send a clearer signal next week on plans to start phasing out pandemic-era stimulus as early as November, as U.S. consumers continue to fuel the economic recovery.

The Federal Open Market Committee responsible for setting policy meets on Tuesday for a two-day meeting that is expected to shed light on the fate of the massive bond buying program it put in place last year to stabilize financial markets and support the economy.

The details will be accompanied by a new set of projections for growth, unemployment and inflation and, most importantly, individual expectations as to when interest rates might start to rise from near zero levels of today.

Jay Powell, Chairman of the Fed, noted last month, he thinks a decision to cut or “cut” those purchases by the end of the year might be “appropriate” if the economy continues to do as expected. This message was reiterated in early September by one of his closest senior associates, John Williams, chairman of the New York branch of the central bank, even after a surprisingly weak employment report in August.

The Fed has pledged to buy $ 120 billion worth of treasury bills and agency mortgage-backed securities each month until it sees “further substantial progress” towards average inflation of 2 % and a maximum employment rate.

Powell said last month that the first of those goals has already been met. The pace of consumer price growth in the United States is still hovering near a 13-year high as signs start to climb in some areas and broaden in others. He also noted “clear progress” in the recovery of the labor market.

His more “hawkish” colleagues have argued the economy is already on sufficiently solid footing to start reducing support, suggesting an announcement as early as November.

“They said they would give us a lot of notice,” said Diane Swonk, chief economist at Grant Thornton. “We need a warning now, and we need a road map.”

A decision in November would give the Fed just one more jobs report to assess before making its decision, while December gives the central bank time to analyze September and October’s job gains. . Another “failed” report could postpone the first timeline, said Michael Feroli, chief economist at JPMorgan, although he said it would take “something bad enough to derail them now.”

Economists predict that such a pivot is ahead, with the statement to be released after the conclusion of the meeting on Wednesday updated to reflect the progress made so far towards those two cut points. Barbara Reinhardt, head of asset allocation at Voya Financial, also expects Powell to be “resolved” that the tapering is not tightening and that the timing of a reduction in asset purchases does not yield any signal on future interest rate hikes.

“$ 120 billion a month is just a huge amount of money, and they announced it in the throes of last year as the world crumbled,” Ajay Rajadhyaksha added, head of macro research at Barclays. “Now you are on the other side.”

Once the Fed starts to slow down, which he says will officially start in December, Rajadhyaksha expects a pace of $ 25 to $ 30 billion per meeting, so the process will end in the second quarter of next year. Others suggest a slower decline of $ 15 billion.

The meeting will also bring new forecasts on the economic outlook and a much-anticipated update to the dot plot of individual interest rate projections, which will for the first time include a 2024 forecast. The latest release in June indicated at least two interest rate hikes in 2023, a faster than expected pace and which shaken Financial markets.

The September update could bring another surprise, although Powell warned that the dot plot should be taken “with a grain of salt.”

Roberto Perli, former Fed staff member and head of global policy research at Cornerstone Macro, this time warned of significant “upside risks” that could indicate a more aggressive approach to reducing monetary support .

“Points are a big unknown,” he said. “We know these aren’t commitments, but the market is still paying a lot of attention to them.”

Standard Chartered’s Steven Englander speculates that enough Fed officials could bring forward their take-off schedule so that the dot chart shows an interest rate hike in 2022. This should be accompanied by a sharp upward revision inflation forecasts, which in June were 3% for 2021 and 2.1% for 2022.

The growth path for gross domestic product could get out of hand, Englander added, but any deterioration would reflect problems on the supply side rather than cooling demand. The latest retail sales report show consumers are spending at a healthy pace despite new concerns about the virus.

Morgan Stanley economists do not predict any price increase for 2022, but more for the following years. Another is expected to be added in 2023, for a total of three, followed by three more throughout 2024

“As we become clearer on Covid and the economy starts to settle into a good pace, we will finally see how fast the Fed expects from a bullish standpoint,” said Tom Porcelli, Chief Economist of the United States. at RBC Capital Markets. “We’re going to start to see a pattern emerge. “

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