The Federal Reserve is likely to become a harder-speaking central bank


Federal Reserve Chairman Jerome Powell attends the House Financial Services Committee hearing on Capitol Hill in Washington on September 30, 2021.

Al Drago | Reuters

Expect tougher talks from the Federal Reserve as it may consider ending its borrowing program sooner than expected.

Based on comments from a number of Fed officials, market pros now expect the central bank to attend the meeting on Nov. 14-15. December will discuss whether it should move faster to end its quantitative easing program.

“They’re going to accelerate the throttling in December, and it now looks like growth could easily exceed 6% and reach 7% in the fourth quarter,” said Diane Swonk, chief economist at Grant Thornton. “The economy is strong and hot. It doesn’t matter. It’s a boom. You can’t escape it. The Fed has to adapt.”

Even if it does not decide to reduce further bond purchases in December, the Fed’s tone is likely to sound much more restrictive than before in the post-pandemic period.

A tougher fed

Fed officials gave after their In early November that they would begin slowing bond purchases at a pace of $ 15 billion a month, which would effectively end the program in mid-2022, targeting zero.

Minutes of that meeting, released on Wednesday, show that some Fed officials want assets to be reduced faster, and various members said the central bank may need to raise rates faster if inflation continues to rise. The shares were sold after the announcement at 2 p.m.

“If you want a distance between tapering and take-off, you have to put it out of the way. That’s justified. We have a strong economy,” said Swonk.

San Francisco Fed President Mary Daly, believed to be a dove, was the newest officer on Wednesday to say the central bank could accelerate the end of its $ 120 billion monthly bond purchase program.

Over the past week, expectations for a rate hike by the Fed have risen dramatically, and Daly’s comment has pushed them even higher.

According to Peter Boockvar, chief investment officer of the Bleakley Advisory Group, the futures market now reflects a 66 percent chance of a quarter point hike in May and a 60 percent chance of a third rate hike by December next. Other rates have risen as well, particularly the 2-year bond, which is closely tied to Fed funds.

The 2-year rate was 0.64% on Wednesday.

Fed Governor Christopher Waller and Fed Vice President Richard Clarida both mentioned an acceleration of the taper process last week. Waller said last Friday that the Fed should end its purchases in April rather than June.

“Now, at the December meeting, the real thing is whether the Fed will make a decision to accelerate tapering or if it will say it talked about accelerating tapering,” Boockvar said. He said the Fed would also have more data by December showing stronger consumer inflation and a strong labor market.

A balancing act

the The latest report hit core consumer spending inflation, which rose 4.1% yoy in October, its highest level since 1991. Economists expect the November Employment Report to add more than 500,000 new payrolls when it goes a week off Friday will be released. Weekly jobless claims were 199,000, their lowest level since 1969.

However, Vincent Reinhart, chief economist at Dreyfus and Mellon, doesn’t expect the Fed to opt for a faster throttle.

“We are in a phase where market participants are overtaking themselves. All Fed officials do is say they want options available. I think they want to sound more restrictive on this,” said Reinhart. “What if market participants think you have no idea about inflation and are behind the curve … The paradox they are in is that they talk harsh, they may not have to be that harsh.”

He said it was a balancing act for the Fed to sound like it was ready to fight inflation but not sound so restrictive that the market was moving too much.

“The fact that they are withdrawing $ 15 billion a month is already quickly recognized by precedents,” he said. “But I don’t think they would unless they wanted to send out an extremely strong signal. … changing asset purchases would be such an extremely strong signal because it is a blunt instrument. You probably don’t want to resort to it. You don’t get much out of it if you just talk about bringing the date forward a few months. “

President Joe Biden elected Fed chief Jerome Powell for a second term this week. His confirmation hearing is expected to take place before Congress next month, and that should give him an opportunity to sound more restrictive and emphasize that the Fed will do everything possible to contain inflation.

Boockvar said he anticipates the central bank will focus on the bond program before having to adjust its views on interest rates. In the past, the markets became volatile when the quantitative easing programs ended. “I think the Fed will focus first on dealing with the taper without causing any accidents. There is no reason for them to speculate about when they will hike rates,” he said.


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