The Federal Reserve is likely to become a more difficult central bank to say

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

Al Drago | Reuters

Expect tougher talks from the Federal Reserve, as it may consider cutting its bond program sooner than expected.

Based on comments from several Fed officials, market experts now expect the central bank to discuss at its December 14-15 meeting whether it should move even faster to close the deal. end the quantitative easing program or not.

“They’re going to pick up pace gradually in December and now it looks like growth could easily pass 6% and possibly hit 7% in the fourth quarter,” said Diane Swonk, chief economist at Grant Thornton. . “The economy is strong and hot. That’s not a bad thing. It’s a boom. You can’t get out of it. The Fed has to adjust.”

Even if it doesn’t decide to cut bond purchases more in December, the Fed’s tone will sound much more hawkish than it has been in the post-pandemic era.

Fed more difficult

Fed officials announced after early November meeting that they will begin slowing bond purchases at a rate of $15 billion a month, effectively ending the program in mid-2022. Once that program is complete, the window of opportunity for the Fed begins. raise the target interest rate for funds allocated from zero.

Minutes of that meeting, released Wednesday, showed some Fed officials wanted a faster rate of asset reduction, and various members said Central banks may need to raise rates faster if inflation continues to rise. Shares sold off after the 2pm release.

“If they want any gap between descending and taking off, they need to get rid of it,” Swonk said. That makes sense. We have a strong economy.

San Francisco Fed President Mary Daly, billed as a dove, is the newest official on Wednesday to say the central bank could accelerate the end of its $120 billion monthly bond-buying program.

Over the past week, expectations of a Fed rate hike have risen dramatically, and Daly’s comments have pushed them higher.

According to Peter Boockvar, chief investment officer at Bleakley Advisory Group, the futures market reflects a 66% chance of a quarter point rate hike in May and a 60% chance of a third rate hike in December. Other interest rates are also moving higher, especially for 2-year bonds, which are closely linked to the funding sources provided.

Two-year futures were at 0.64% on Wednesday.

Fed Governor Christopher Waller and Fed Vice Chairman Richard Clarida both mentioned accelerating the tapering process last week. Waller said last Friday that the Fed will end purchases in April, instead of June.

“Now that’s a fact at the December meeting, will the Fed make a decision on a taper rate increase or will they say they talked about a taper increase,” Boockvar said. The Fed will also have more data in December, he said, showing hotter consumer inflation and a strong job market.

A balancing act

NS latest report is core personal consumption spending inflation, up 4.1% year-on-year in October, the highest level since 1991. Economists expect November’s jobs report to show more £500,000 has been added, when it was announced a week from Friday. Weekly jobless claims at 199,000, the lowest since 1969.

But Vincent Reinhart, chief economist at Dreyfus and Mellon, doesn’t expect the Fed to decide on a faster cut.

“We’re at a stage where market participants are getting ahead. All the Fed officials are doing is saying they want options available. I think they want to hear it,” Reinhart said. seems more hawkish in that context.” “What if market participants think you’re ignorant of inflation and you’re behind the curve… The paradox they have is that by talking hard, they can There’s no need to be so tough.”

It’s a balancing act, he said, so that the Fed looks ready to fight inflation but doesn’t sound so hawkish that the market moves too much.

“The fact that they’re raking in $15 billion a month is way too fast for precedent,” he said. “But I don’t think they’re going to do that unless they want to send an extremely strong signal. … A change to buy an asset would have to send such an incredibly strong signal, because that’s what it is.” It’s a blunt tool. They probably don’t want to use that. They won’t understand much if you’re just talking about moving dates after a few months.”

President Joe Biden selected Fed Chairman Jerome Powell for a second term this week. His confirmation hearing is scheduled to take place before Congress next month, and it will be his opportunity to be more hawkish and emphasize that the Fed will do what is necessary to rein in inflation. .

Boockvar said he expects the central bank to focus on the bond program before it needs to adjust its stance on interest rates. In the past, the market has become volatile when quantitative easing programs ended. “I think the Fed will focus on getting the cone done first without creating any accidents. There’s no reason for them to speculate on when they’ll raise rates,” he said. The Federal Reserve is likely to become a more difficult central bank to say

Sarah Ridley

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