The Fed meeting ends today. Look for clues to the timing of the taper, the takeoff of interest rates.

Today’s Federal Reserve meeting is set to be one of the most interesting in some time. Investors are looking for more information on the Fed’s plans to start cutting monthly purchases of treasury and mortgage-backed securities, and board to release updated dot chart of economic projections and quarterly interest rates until 2024.

All of this comes as markets are reeling from concerns over the potential failure of Chinese real estate giant Evergrande Group, not to mention slowing growth, rising inflation, Washington’s deadlock over the ceiling of debt and the resurgence of the pandemic. Fed Chairman Jerome Powell at his post-meeting press conference will seek to assure investors that the central bank is aware of growing risks and is not considering raising interest rates while potentially having to recognize higher inflation expectations and a more hawkish dot plot.

Here’s what to expect when the Federal Open Market Committee’s statement and summary of economic projections are released Wednesday at 2 p.m. EST, followed by Powell’s press conference at 2:30 p.m. ET.

Taper synchronization

Wall Street expects the FOMC to formally present plans in November to start cutting its $ 120 billion in monthly bond purchases. This means investors should be prepared for a signal on Wednesday that the official announcement will come after the next meeting on November 2-3.

Aneta Markowska, chief economist at Jefferies, says she expects the FOMC to open the door to a possible cutback announcement in November, subject to a solid job gain in September. Markowska estimates that September’s non-farm payroll is rising to around 750,000, which she says should be wiped out “fairly easily.” Since there is only one jobs report by the November meeting, economists say a decision to start cutting purchases in November will depend on the September wages report. Another misfire, says Markowska, and the Fed could postpone the decision until December.

Any degressive development can appear in two places. Markowska expects the FOMC statement to reiterate Powell’s August speech in Jackson Hole, where he said the ‘substantial further progress’ test had been met for inflation and where ‘clear progress’ were made towards maximum employment. (In the Fed’s parlance, “clear progress” is not quite “substantial further progress.)

Specifically, economists at Goldman Sachs expect the updated statement to say something like: “The Committee plans to start slowing the pace of its asset purchases fairly quickly, provided the economy changes. overall as expected “.

Others expect less formality. Kathy Bostjancic, an economist at Oxford Economics, sees Powell further signal at her press conference that the reduction is about to begin in November. This, she says, is a clearer way to provide additional guidance over the policy statement.

New economic forecasts

Economists say investors have already largely integrated the price of tapering. More interesting, says Markowska, is the new Summary of Economic Projections. For the first time, policymakers will submit forecasts for 2024.

Here’s where there’s a chance for a hawkish surprise. The Fed must revise upwards its inflation forecasts for this year given the still warm figures. Even if Fed officials assume 0.1% month-over-month increases by year-end, the Fed’s preferred inflation gauge would average 3.5% year over year in the fourth quarter, Markowska said. She notes that this is up from 3% in June and well above the Fed’s long-standing 2% target.

The question is whether an upward revised inflation forecast for this year affects members’ inflation projections for 2022 and 2023. Markowska sees a good chance that these forecasts will also be revised upwards, given the pressures persistent wages and rising inflation expectations. Higher inflation forecasts beyond 2021 would challenge the notion of “transient” inflation.

At the same time, growth forecasts must be revised downwards. Goldman economists say their GDP forecast for 2021 has fallen more than 2 percentage points on a Q4 / Q4 basis since June, and they also expect the FOMC to significantly reduce its 2021 projection.

Join the dots

The updated dot plot is another place ripe for a hawkish surprise. It would only take two members to lift their “no change” points for half of the FOMC to expect at least one rate hike in 2022, says Bostjancic of Oxford Economics. It expects median interest rate forecasts to show monetary policy tightening earlier and faster than expected, although its base case is two increases of 0.25% in 2023. The Fed has so far suggested that interest rates would not increase. before 2024.

Markowska, on the other hand, sees less than a 50/50 chance that the updated FOMC points chart suggests rates will take off in 2022. First, any participant who lifts their 2022 point must also improve their labor market outlook. , for which Markowska says there is little justification. Second, Markowska says there is only one obvious point – that of Boston Fed Chairman Eric Rosengren – that is likely to change. Other points at stake, she says, include those of Gov. Michelle Bowman, Gov. Randal Quarles and Richmond Fed chairman Thomas Barkin.

The bond market predicts an almost 70% chance of a rate hike in 2022 and a cumulative tightening of 75 basis points by the end of 2023. If bonds are right and two members push their points to signal take off in 2022, Powell will be in an awkward position. Powell’s promise that tapering will not start the tightening clock, as it has in the past, has helped investors ignore tapering.

“Such a result would present a communication challenge for President Powell as he tries to decouple the timing of the slowdown from the rate take-off,” Bostjancic said.

Write to Lisa Beilfuss at [email protected]

Comments are closed.