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Fed likely to open bond-buying ‘taper’ door, but hedge on outlook By Reuters


© Reuters. FILE PHOTO. Jerome Powell (Federal Reserve Chair) testifies in a U.S. House Oversight and Reform Select Subcommittee Hearing on the Coronavirus Crisis, which took place on Capitol Hill in Washington. June 22, 2021. Graeme Jennings/Pool via REUTERS/File Photo


By Howard Schneider

WASHINGTON (Reuters) – The Federal Reserve is expected to clear the way on Wednesday for reductions to its monthly asset purchases later this year and show in updated projections whether higher-than-expected inflation or a resurgent coronavirus pandemic is weighing more on the economic outlook.

Fed policymakers are finishing up their two-day meeting. They have received conflicting developments from late July, including signs of a slowdown within the service sector and a surge in COVID-19 that is more than double that of last year. In addition to still high inflation, they also had to decide how to respond.

Most officials believe that economic recovery will continue. The U.S. central banks plans to cut its monthly Treasuries purchases and mortgage-backed Securities by $120 billion before the end 2021 and then wind down the entire portfolio in the first quarter of 2019.

Forecasters and analysts outside the Fed expect it to make a hedge as to when that “taper” will begin and link it with a recovery in job growth after the disappointing August report, which showed only 235,000 new jobs.

At 2 pm EDT (1700 GMT), the Fed will release its most recent policy statement, and provide economic projections. Fed Chair Jerome Powell will hold a press conference to discuss the results half an hour later.

The statement will likely acknowledge that the economy has taken another step towards the “substantial further progress” the Fed has said it wants to see in the labor market before reducing its bond purchases, Jefferies (NYSE:) economists Aneta Markowska and Thomas Simons said in an analysis. August jobs growth was not good, but nonfarm payrolls increased on average 716,000.

High-frequency data, as well as other indicators, suggest that any future jobs gains will disappoint. Jefferies analysts believe the “conditional” reduction of asset purchases in September is likely to be a condition for a strong employment increase.

The U.S. employment market is still about 5.3 millions jobs short of its level before the pandemic.

A Reuters survey revealed that more than 60% of economists expected tapering to start in December.

However, Fed officials may need to take time to evaluate the risks from several evolving issues before they decide to reduce the bond-buying program. Financial markets have been roiled in the last week by concerns about spillover effects from the potential collapse of a large Chinese property developer, China Evergrande Group, and the kicked off the week with its largest daily loss in four months.

The U.S. Congress is not moving closer to solving a partisan impasse over the lifting of the federal debt ceiling. With the possibility for partial government shutdowns increasing by the day,


When the bond-buying taper does come, it will mark the start of a shift away from the measures put in place in March 2020 to help the economy through the pandemic, and towards more normal monetary policies that will eventually include higher interest rates.

Powell is expected to find out whether President Joe Biden wishes to nominate Powell for the Fed’s November 2-3 policy meeting. He has made several highly public speeches, including one at the Kansas City Fed research conference, that Powell is not concerned with interest rate debate. This is something Powell will likely reiterate Wednesday.

However, the new interest rate and economic projections by policymakers will help to gauge how quickly rate hikes could follow taper and whether officials have already planned for an increase next year.

As of July, the Fed preferred rate of inflation was 4.2% annually. This is more than twice the central bank’s target of 2% and sufficient to satisfy some Fed officials’ new commitment to allow inflation to run slightly above this target for a time to ensure it is attained on an average. It is also a precursor for raising rates.

This is the result of the Delta-variant of the coronavirus causing a surge in COVID-19 cases.

After the Fed highlighted the positive effect of COVID-19 immunizations in June and stated that the economy appeared to be recovering from the pandemics, the 7-day average of daily infection had risen five-fold to 66,000 at its July 27-28 meeting. The number has almost doubled since that time.

Some indicators of service activity are showing signs of decline, which has caused forecasters to lower their expectations for economic growth in the coming year.

This could be a pattern that may follow for the Fed.