The Fed will try to soothe markets Wednesday, while preparing investors for end to bond buying
After Monday’s market turbulence, the Federal Reserve’s challenge will be to sound reassuring while acknowledging it’s preparing to make its first major step away from the easy policies it put in place to fight the pandemic.
After its meeting on Wednesday, the Fed will publish a policy declaration and the quarterly interest rate forecasts. At 2:30 pm, Jerome Powell, Fed Chairman will brief media. ET It is expected that the central bank will announce plans to reduce its monthly purchase of Treasurys and mortgagebacked securities by $120 billion.
They will likely announce they have had a conversation about tapering. They won’t give any specifics, I think. “I think they will provide a framework so they can begin doing it in November and December,” Rick Rieder, chief investment officer at BlackRock for global fixed income Rick Rieder stated.
The Fed’s meeting began Tuesday, following a turbulent day in global markets on worries that China’s big property developer Evergrande could collapse and spread contagion outside China’s borders. The S&P 500 had its worst day since May on Monday. The stock market stabilized Tuesday as investors looked at the Chinese government for relief.
Do they think the recent price movements in China or markets have had an impact on their thoughts? My guess is that they’ll be discussing it, but I think they’ll end up in exactly the same place as we did.” Rieder added.
Once the taper begins, Rieder expects that the Fed will reduce purchases by $10 billion Treasurys per month and $5 billion in mortgage-backed securities each month.
What could move markets
“By and large, the tapering is probably not a market moving event,” Columbia Threadneedle head of multi-asset strategy Anwiti Bahuguna said. It was noted that Wednesday’s focus will be on forecasts and Fed’s “dotplot”, the chart used by the Fed to show anonymously forecasted interest rates of central bank officers, but she did not mention the Fed’s tapering.
The Fed’s withdrawal from asset purchases might be widely reported, but strategists think its interest-rate forecast may prove to be a surprise card for the markets. The Fed’s inflation expectations will closely follow. In June, it forecast 3.4% for the personal consumption expenditures inflation index this yearAfter falling back to 2.1% by 2022,
In their June forecast, Fed officials indicated that they expected the Fed to increase the target rate by 2.1% in 2023. However, there is a chance this could change. Market pros expect a rise by next year, as two officials predicted the hike would occur in 2022.
If we only see two to three people change their mind, that might be a surprise. There is no chance that [Fed officials] will take the dots off, so the risk is that there are more dots that appear in 2022 and 2023, and the market starts thinking the rate hiking cycle commences next year,” Bahuguna said, noting that would be a “hawkish” message that would be negative for stocks, and it could result in higher interest rates at the short end of the Treasury curve.
In June, the addition of dots to the 2022 forecast was a surprise and suggests some Fed members see the increase in inflation as something more than just transitory, she said. If more Fed officials think inflation is persistent, there is the possibility that this could occur again.
Powell has repeatedly stressed that he believes the jump in inflation is temporary, but some officials inside the Fed have pushed back on that idea.
Consumer price index inflation has run above 5% for the past three months, though the pace cooled slightly in August.
Although Rieder doesn’t expect the Fed change its 2022 interest rate forecast, it will release its 2024 forecast. He stated that these longer-term forecasts are subject to change.
Rieder maintained that they still believe they can taper and allow a window for them to make a move to start raising rates in 2022. They will likely delink rates from the taper but it will allow them to have the flexibility to raise rates in 2022 if employment increases. … But I don’t think they in any way, shape or form transmit that that’s their base case, by any stretch.”
Push back on rate hikes
Rieder said the Fed will make the taper seem more dovish by emphasizing the end of the bond purchase program does not mean a rate hike is coming. The bond market will continue to focus on inflation and rate hike projections.
Mark Cabana from Bank of America, head of U.S. short rate strategy said “Powell” that he will do his best in separating tapering and rate increases.
Cabana stated that “we think they’re going make some modest adjustments to their overall economic forecasts and inflation predictions.” Given the recent softening of data, we believe they will mark down their growth for this year. Given some of the recent firming, they’ll mark up inflation. They will focus on the dots. While we do not expect a hike to occur in 2022 or 2024, they are expected to increase the number of times by 2024. In 2024, we expect three more hikes.
Rieder has been a proponent of the Fed moving to taper its easy policies. He stated that the Fed’s policy and economy were not working as they used to.
He said, “I believe there’s something crucial here.” We are used to data softening. Monetary policy is usually a driver for the modulation. But the data softening is primarily due to the supply side. This isn’t affected by monetary.
The economy is slowing down because of high demand but also supply chain problems and shortages. The Fed stimulates the economy by implementing easy policies. This adds to the dynamic.
Market pros also expect Powell to be asked about recent reports that Fed officials owned and traded securities. CNBC examined the financial statements of three Fed officials and discovered that Powell was among them. Powell also owned municipal bonds. Eric Rosengren, Boston Fed President, invested in REITs. Rob Kaplan, Dallas Fed President owned corporate bonds. The trades appear to be in compliance with Fed rules, and the Fed is conducting a review.