Investors seek clues on interest rate hikes
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Jerome Powell, Chairman of the Federal Reserve, testifies at a hearing by the Senate Banking, Housing and Urban Affairs Committee on the CARES Act, held at Hart Senate Office Building, Washington, DC, U.S.A, September 28th, 2021.
Kevin Dietsch | Reuters
This week, the Federal Reserve is widely expected to announce the unwinding of its monthly bond-buying program – a measure it started to support the economy during the pandemic. The bigger story is what the central bank will do about inflation.
This is because report after report of hotter-than-anticipated inflationExpectations that the Fed will combat the rising trend in higher prices have been raised. The Fed is expected to begin raising interest rates next year approximately six months earlier than previously forecasted by the Federal Reserve.
According to economists, the central bank will announce after Wednesday’s 2-day meeting that the $120 billion monthly bond purchase program will be winded down by December or November and then end it entirely by next year.
Fed Chairman Jerome PowellThe end of the program is not a signal of a new rate increase cycle. He made every effort to make that clear and will likely repeat it at his Wednesday briefing.
No, traders already price in more than two interest rate hikesFor next year, the vast majority of Fed officials don’t see any in 2022 according to their latest forecast. Because inflation is now at an all-time high of a 30-year highThe Fed’s recent policy statements included a “transitory” or temporary description of the Fed. However, the Fed seems to have become more hot and is lingering for longer.
My sense says that the term ‘transitory,’ is no longer relevant. Rick Rieder of BlackRock, the chief investment officer global fixed income, said that he would be stunned if such a word was used again. According to him, it is important that the Fed address employment in the second half of its dual mandate.
Inflation and rising wages
Inflation, as measured by the personal consumption expenditures price index,For September, it rose by 0.3%. This drove the year over-year increase to 4.4% for the first time since January 1991.
To retain workers and keep them, companies are raising their wages in an effort to attract talent.
Rieder claimed that “I believe it’s one of the hottest jobs markets since World War I.” We were the most successful in our industry. [employment cost index]Print since 2004. My view is that the Fed has been behind the curve when it comes to wages. They should open up the possibility of raising rates.
In his post-meeting briefing Rieder stated that he did not anticipate Powell and the Fed discussing raising federal funds rates. The central bank sets the federal funds rate. This is the rate that banks lend and borrow to each other overnight.
Rieder said that “there’s clear movement towards the Fed recognizing how inflation is stickier then they thought.” “I believe [Powell] will lay out data … that they anticipate some of these inflation numbers are coming down, and I think he’s right.”
However, Rieder stated that the Fed must show willingness to increase interest rates if necessary. The CME’s FedWatch ToolThe traders believe that the Fed will raise interest rates by 25% in June, and by 50% in September. A third hike is possible in October.
The first step is to unwind
When the pandemic struck, in 2020, the Fed made unprecedented steps to ease up policy. To quickly provide liquidity for markets, the Fed cut interest rates to zero and instituted the bond-buying programme.
The first major unwinding of any program will see the tapering off bond purchases or quantitative easing. It is expected that the Fed will reveal its intention to slow down Treasury purchases by $10 billion per month, and reduce mortgage securities purchasing by $5 billion per month.
Covid, which is the Fed’s wildcard, has caused a rapid slowdown in third-quarter growth. Only 2% growth was recorded in Gross Domestic Product, which was less than what economists had expected. Although the Fed may acknowledge slower growth in the future, economists see this trend picking up in the current quarter.
Mark Cabana is the head of U.S. Short Rates Strategy at Bank of America. He said that there was a possibility that the Fed may say that it might speed up or slowdown its tapering process depending on what’s needed.
Markets could be affected by the possibility that the central bank might talk about increasing pace. Some Fed members have advocated a faster rollback than the previous meeting. Cabana stated, “That only raises the possibility that the Fed winds up sounding too hawkish.”
Inflation rates
Powell may not speak about raising interest rates. However, he isn’t likely to stop the market pricing in rate hikes.
“The July …. first rate rise is in place. The Fed shouldn’t delay in raising rates. Cabana stated that the Fed isn’t going to lie to the market. “There is an upside inflation risk. They aren’t sure of the evolution of inflation.
Rieder indicated that he is not confident Powell will talk about the possibility to taper more quickly. His gut feeling is that this topic isn’t being addressed today. However, Rieder said that even if Powell stated that it was possible to taper more quickly, the markets would understand that because they might be raising rates earlier and/or aggressively.
Powell may be wrong about the connection between bond buying and tapering, but the main interest of the market is inflation and possible rate changes.
Grant Thornton’s chief economist, Diane Swonk said that she believes the Fed will raise interest rates in 2019.
Our own projections show that core PCE… will peak at above 4% in the year-end, and then slow down to 3.5% by 2022. Swonk stated that the unemployment rate will fall below 4% by 2022’s first half. These shifts will lead to faster tapering and higher rate increases than what the Federal Reserve forecasted in September. The market participants expect three rate increases next year. We could also see additional.
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