Federal Reserve Jerome Powell testifies during a Senate Banking Commission hearing on the “Quarterly Report to Congress on the CARES Act” at US Capitol in Washington, USA, December 1, 2020.
Susan Walsh | Reuters
Federal Reserve officials are likely to paint a solid picture of the economy next week without even hinting at future policy changes.
Investors have increasingly trusted central bankers when they say that, even with the economy spinning at its hottest pace in nearly 40 years, they will not begin to take away a political adjustment until it becomes clear that the recovery is on ground. solid.
“The economic outlook is pretty good as long as the Fed keeps its foot on the pedal,” said Randy Frederick, Charles Schwab’s vice president of trading and derivatives. “The market has finally accepted that they will.”
The Fed has kept short-term lending rates close to zero since the start of the Covid-19 pandemic and has continued to purchase at least $ 120 billion of bond-related assets each month. Asset purchases have pushed the central bank’s balance sheet to nearly $ 8 trillion, or about double its level since the start of the crisis.
Financial markets, however, have been wary that with economic data strengthening by the day and inflationary pressures starting to build, the Fed may find itself under pressure to start easing the accelerator.
“They are providing liquidity that will fuel an economic recovery,” Frederick said. “The challenge was when they decided to retire.”
It is unlikely that there will be any clues as to when that date might come when the Federal Open Market Committee, the central bank’s monetary policy arm, concludes its two-day meeting on Wednesday.
Instead, the public is likely to receive a statement that “will strike a more optimistic tone about the economic outlook” that “may turn out to be the most positive the Fed has released in some time,” wrote Andrew Hunter, senior US economist. Capital Economy.
Like many others on Wall Street, Hunter believes Fed Chairman Jerome Powell and his cohorts will improve their view of the economy, but point out that some distance remains from the “substantial further progress” benchmark that the FOMC has set in the his recent post-meeting statements.
Powell recently caught the market’s attention when he told “60 Minutes” that the economy has reached a “tipping point” in the recovery. But he also went on to emphasize the continuing steps the labor market must take to achieve full employment that is inclusive across income, race and gender groups.
Likewise, the Fed chairman may want to be at least a little shy during his post-meeting press conference on the future policy arc, particularly on potential rate hikes and retreats in the pace of asset purchases.
“Powell said he would wire the taper. I think he will hold his cards close to his vest, waiting until the last possible minute,” said Tom Graff, head of fixed income at Brown Advisory. “I doubt the telegraph will arrive this month, and besides I think the telegraph will arrive suddenly.”
There is an informal consensus on Wall Street that Powell will likely start talking about tapering this summer, with the expectation of a slight decline in bond purchases by the end of the year.
“They will want to type for a while before they hike, and they will want to create some flexibility,” Graff said.
A possible streamlined program
Goldman Sachs economist David Mericle said he sees “hints of tapering” at some point in the second half of the year, kicking off in early 2022. He expects the initial reduction to be $ 15. billion per meeting, compared to $ 10 billion a month at the pace used by the Fed during its 2014 reduction. The Fed meets eight times a year, so the totals would be equivalent.
Those details, however, are not yet to arrive.
“Despite the recent acceleration, we believe it is clearly too early for the FOMC to start hinting at tapering,” Mericle wrote in a client report. “Although President Powell has recently begun to describe the economy as a ‘tipping point’, we don’t think he means it as a signal on politics.”
If the Fed decides to start tapering this year, it could start raising rates as early as late 2022, according to Citigroup economist Andrew Hollenhorst.
“At the April FOMC we expect to see some changes to the statement to suggest recently stronger data, but no new formal guidance on tapering. This could come after a strong print of jobs for April and / or May, both of which will be released before. the next meeting, “wrote Hollenhorst.
According to the CME’s FedWatch tool, traders in the federal funds futures market are actually considering a tiny chance – 2.8% – of a rate hike at next week’s meeting. The outlook increases slightly over the year, with a 10.5% probability discounted by the end of the year.
Looking further, the market is setting a fund rate of 0.23% by the end of 2022, or 16 basis points above the current level of 0.07%. This implies a strong possibility of a rate hike. The end of 2023 indicates a fund rate of 0.42%, the equivalent of an increase of another quarter of a percentage point.
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