The Federal Reserve is expected to have an extended discussion next week on a slowdown in monthly bond purchases, which are so important to the financial markets.
But investors who expect clear answers to the crucial questions of when the throttling will begin and the pace of retreat will likely be disappointed, economists said.
New worries about global economic growth and the spread of the delta variant of the coronavirus have eased inflation concerns somewhat and put some pressure on the Fed to be more open on its plans to reduce the throttling, economists said.
“We assume that Chairman Powell will stop signaling that the throttling is imminent,” said Matthew Luzzetti, US chief economist at Deutsche Bank, in an interview.
Vince Reinhart, Mellon’s chief economist, agreed.
“I think Jay Powell is having a little easier time than you thought weeks ago. Concerns about the delta have been linked to less concern about inflation and more concern about the global outlook. And so the drum beat [for the Fed] Proving hard evidence that they are on the way to slow asset purchases will be a little less intense, ”he said.
Mohamed El-Erian, Allianz’s chief economist advisor, said most markets will hear next week that “some conditioning is to be expected, expecting a lowering towards the end of the year”.
The Fed will meet next Tuesday and Wednesday and issue a statement at 2 p.m. at the end of the second day of negotiations. Powell will follow with a press conference at 2:30 p.m. Eastern.
Since the outbreak of the pandemic, the Fed has kept its key interest rate close to zero. When it became clear early last year that the economy had to shut down, the Fed stepped in and bought trillions of dollars in national debt to calm the financial markets. The central bank eventually slowed purchases to a steady pace of $ 120 billion a month last summer – made up of $ 80 billion in government bonds and $ 40 billion in mortgage-backed securities.
Last December, the central bank said it would not slow purchases until “significant” progress was made towards the central bank’s goals of a healthy labor market and stable inflation of 2%.
The monetary policy hawks on the Fed’s policy-making committee are downplaying this requirement and want the central bank to start the process sooner rather than later.
But the majority on the Fed’s Interest Rate Committee, led by Powell, told Congress last week that significant progress was “still a long way off.”
In June, with the recession in the rearview mirror and the economic recovery with rising inflation, the Fed finally began “talking about” when to slow these bond purchases.
Minutes of the June Fed meeting said that Fed officials “generally believed that, in the interests of prudent planning, it was important to be well positioned to control the pace of asset purchases, if any, in response to unexpected events to reduce economic developments ”.
As a result, at next week’s meeting, economists believe the Fed will execute the planning and review a number of tapering scenarios, such as slowing MBS purchases faster than US Treasuries, but no decisions are expected.
This is a feature, and not a flaw, of the Fed’s communications strategy, economists said, but analysts agree that much depends on the upcoming employment reports.
Powell’s earliest testimony about tapering could come in late August during the Fed’s summer retreat in Jackson Hole, Wyoming, according to economists.
But many others think this is too early to announce a reduction and are planning to make an announcement at the FOMC May 21-21 meeting. September. Others watch the Fed wait until its November 2-3 meeting so they can gauge how the economy and working conditions will react after the children return to personal school in the fall.
Economists generally agree that the Fed will not raise its policy rate until it completely stops monthly buying.
That should take about eight months, said Kathy Bostjancic, chief economist for US financial markets at Oxford Economics.
The big picture is that the Fed’s monetary policy will remain loose until the key rate moves well above zero.
As the Fed discussed next week, many economists became increasingly uneasy about the Fed’s “flexible average inflation targets” strategy adopted last year. As part of this new strategy, the Fed promised to wait for actual data and not make any forecasts.
That seemed like a reasonable strategy when inflation was low, but inflation has come down sharply this year and is now well above the 2% target. The consumer price index rose to 5.4% in the last 12 months to June.
Economists struggle to weigh the central bank’s response to higher inflation in the face of this new approach. Powell says higher inflation is “temporary,” but there is a growing feeling that it may persist.
The bottom line for next week will be that the Fed is taking its foot off the gas, said Ed Hyman, chairman of Evercore ISI.
“They move and they will move on,” he said in an interview with Bloomberg Radio. Whether the tapering starts in December or January doesn’t make much of a difference in the overall picture, he added.
And whether inflation will force them to move faster than currently expected – that is a question for another day.
El-Erian insists that ultimately the Fed must move faster towards tightening.
“They will try to condition the market for a very gradual reduction first and then reality will move in,” said El-Erian.
“This inflation episode is very different from the one we’ve had for decades,” he said.
El-Erian said he felt his prediction matched his call for a “new normal” in 2009 or years of discouraging low global economic growth following the global financial crisis.
U.S. stocks DJIA, + 0.62% SPX, + 0.99% were higher for the fourth straight day after fainting on Monday over concerns over the spread of the delta variant of the coronavirus.
The yield on 10-year US Treasuries TMUBMUSD10Y rose from 1.284% to just under 1.3% after falling to 1.17% earlier in the week.