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Federal Reserve likely to become a tougher talking central bank, could end bond program sooner

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Jerome Powell, Chairman of the Federal Reserve, attends the hearing by House Financial Services Committee on Capitol Hill, Washington, U.S.A, September 30, 2021.

Al Drago | Reuters

The Federal Reserve may be more aggressive than usual, and it could consider ending its bond program earlier than anticipated.

According to comments made by a variety of Fed officials market professionals now believe that the central bank will discuss whether or not they need to move faster in order to stop their quantitative easing program at its Dec. 14-15 meeting.

Grant Thornton chief economist Diane Swonk stated that tapering will be accelerated in December and growth now appears to easily surpass 6%. She also believes it could reach 7% by the fourth quarter. The economy is hot and strong. This is not a negative thing. It is a boom. You can’t escape it. It is up to the Fed to adapt.”

The Fed should be more hawkish in its tone than in previous periods after the pandemic.

Fed tougher

Fed officials declared after the early November meetingThe Fed would reduce the rate of bond purchases to $15 billion per month. That would effectively bring an end to the program by 2022. After the completion of the program, it is possible for the Fed’s target rate to be raised from zero.

Minutes of that meeting were released Wednesday. They show that Fed officials are seeking a more rapid pace to taper assets. Different members also stated that they support the speed. central bank may need to raise interest rates faster if inflation keeps rising. After the release at 2 p.m., stocks were sold off.

If they wish to be able to move any distance between tapering and liftoff they must do so. It’s justified. Swonk stated, “We have a solid economy.”

San Francisco Fed President Mary Daly, considered a dove, was the latest officialOn Wednesday, the central bank stated that it could accelerate the termination of the $120 billion monthly bond buying program.

The expectations of a Fed rate increase have increased dramatically over the last week. Daly’s comment has pushed them further.

The futures market currently shows a 66% chance that the May quarter rate will be raised and a 60% chance of a December third rate increase, says Peter Boockvar chief investment officer at Bleakley Advisory Group. Some other rates are also moving higher, particularly the 2-year bond which closely links to Fed funds.

On Wednesday, the 2-year fixed-rate mortgage was at 0.64%.

Last week, both the Fed Governor Christopher Waller (Fed Vice Chairman Richard Clarida) mentioned that taper should be accelerated. Waller said last FridayThe Fed should stop buying in April and not June.

Boockvar said, “Now it’s real at the December gathering whether the Fed makes a decision regarding speeding up tapering. They’ll either say that they spoke about speeding taper,” Boockvar stated that the Fed would also be able to show more data by December. This will include more consumer inflation and strong job market.

Fed: A balance act

It latest reportThe core personal consumption expenses inflation was up 4.1% in October, which is the highest level since 1991. Economists predict that November’s Employment Report will reveal more than 500,000 new payrolls. The report is expected to be released one week after Friday. Weekly jobless claims were at 199,000, the lowest since 1969.

Vincent Reinhart is the chief economist at Dreyfus and Mellon. He doesn’t expect the Fed will decide to reduce its tapering rate any faster.

We are at the point where market participants get ahead of ourselves. Fed officials say they are open to options. Reinhart said that Fed officials want to be more hawkish when they are in this situation. What happens when market participants believe you don’t know anything about inflation? They may be behind the curve. The paradox is that they talk tough but they might not need to be as tough.

It is important for the Fed not to appear too hawkish and cause the market to move too fast.

He said that the fact they are taking $15 billion off per month is fast by historical precedents. But I doubt they’d do it without sending a strong signal… Because it’s blunt, it would send such a strong signal to change asset purchases. Most likely they don’t wish to use that. If you are only talking about moving the date forward by a few months, they don’t really get much out of it.”

The President Joe Biden has elected Jerome Powell, Fed Chairman, for a second term. The confirmation hearing will be held before Congress next month. This should give him an opportunity to speak more hawkishly and stress that the Fed will curb inflation.

Boockvar stated that he believes the central bank will be focusing on the bond program first before considering changing its views on interest rates. The end of quantitative easing programs has caused markets to become volatile. “I believe that the Fed is going to be focusing on the taper first, without creating any accidental events. He said that there’s no reason for them to speculate about when they will raise interest rates.

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