Friday, October 15, 2021

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

WASHINGTON — The Federal Reserve is expected to clear the way for a cut in its monthly asset purchases later this year, and updated projections are expected to show whether higher-than-expected inflation or a resurgent coronavirus pandemic is weighing heavily on the economic outlook. .

Fed policymakers, as they wrap up their latest two-day meeting, have been assigned a conflicting set of developments since late July – signs of a slowdown in the services sector, a COVID-19 boom that hit last summer and weak jobs. growth in August, everyone was still battling with each other about how to react, along with strong inflation.

Officials have said for the most part that economic recovery will continue and allow the US central bank to move forward with plans to reduce $120 billion in monthly purchases of treasuries and mortgage-backed securities by the end of 2021, and they will shut down completely. first half of next year.

But forecasters and outside analysts expect the Fed to defend exactly when the “cone” may begin, and after a disappointingly weak report in August, when only 235,000 jobs were created, it was seen as a rebound in job growth. added with.

The Fed is due to release its latest policy statement and economic projections at 2 p.m. EDT (1800 GMT), with Fed Chair Jerome Powell holding a news conference half an hour later to discuss the result.

In a statement acknowledging that the economy has taken another step towards “considerable further progress”, the Fed said it would like to see the labor market slow down before reducing its bond purchases, said Jefferies economist Anita Markoska. And Thomas Simmons said in an analysis. While August job growth was disappointing, US non-farm payrolls increased by just over 1 million in July and have increased by an average of 716,000 since May.

Cranberry Township, PA.  hiring sign in
Hiring signs are posted outside a gas station on May 5, 2021 in Cranberry Township, Butler County, Pa. (Keith Sarkosik/AP Photo)

Still, high-frequency data and alternative employment indicators indicated that upcoming jobs gains could also disappoint, and analysts at Jefferies said the first real reduction in asset purchases would be “conditional on September’s solid employment gains.”

The US job market remains at around 5.3 million positions compared to before the pandemic.

More than 60 percent of economists who responded to the Reuters poll said they expect bond buying to begin in December.

However, Fed officials may decide that they need more time to assess risks from certain emerging issues before deciding to proceed with a reduction in the bond-buying program. Financial markets have been stirred last week by concerns about spillover effects from the potential collapse of China Evergrande Group, a major Chinese property developer, and the S&P 500 index started the week with its biggest daily loss in four months.

Read Also:  Wall Street ends near flat on cautionary note ahead of Fed

Meanwhile, US lawmakers seem no closer to resolving a partisan impasse in Congress over lifting the federal debt limit, with the prospect of a partial shutdown of the federal government increasing day by day.

inflation monitoring

When bond-buying tapers off, it will mark the beginning of a shift away from the measures taken in March 2020 to help the economy through the pandemic, and toward more general monetary policies, which will eventually include higher interest rates. will be involved.

Federal Reserve Building
Federal Reserve Building
The Federal Reserve building in Washington on May 1, 2020. (Kevin Lamarck/Reuters)

Powell, who is likely to know before the Fed’s November 2-3 policy meeting whether President Joe Biden wants to nominate him for a second term as head of the central bank, insisted in several high-profile speeches Including one Kansas City. Fed research conference last month, that the eventual start of a bond-buying taper is unrelated to the debate over interest rates. This is a point that is likely to be repeated on Wednesday.

New economic and interest rate projections from policymakers, however, will provide some understanding of how fast rate hikes may follow the taper, and especially whether officials penciling in preliminary increases for next year in the fight for higher inflation. are.

The Fed’s preferred measure of inflation as of July stood at about 4.2 percent on an annualized basis. This is more than double the central bank’s 2 percent target and, in the minds of some officials, it is enough to meet the central bank’s new promise to allow inflation to moderate for some time from that target, to ensure that It has reached average, a harbinger for raising rates.

Leaning in the other direction: the surge of COVID-19 infections driven by the delta version of the coronavirus.

Since June, when the Fed noted the positive impact of the COVID-19 vaccination and said the economy appeared to be recovering from the pandemic, the seven-day average of new daily infections has five times the central bank’s by July 27. increased to 66,000. -28 meeting. It has almost doubled since then.

Some measures of service activity declined, prompting forecasters to characterize their outlook for economic growth this year.

The Fed may well follow suit.

by Howard Schneider

Reuters

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This News Originally From – The Epoch Times

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