By Christopher Rugab
WASHINGTON (AP) – The Federal Reserve is expected to send a clear signal this week that it will resume control of its ultra-low interest rate policies later this year, the first step toward the overwhelming support it has received from the economy since the epidemic 18 months ago. Was.
Many economists think the Fed will officially announce a withdrawal in November, in response to a stable recovery from the epidemic recession and the acceleration of inflation which has caused widespread concern. This week’s Fed policy meeting could lay the groundwork for that announcement.
By the time their meeting ends on Wednesday, Fed officials are ready to keep their short-term benchmark interest rates, which affect many consumer and business loans near zero. They will probably maintain their 120 120 billion monthly bond purchase, which is intended to maintain long-term loan rates. In December, the Fed said these purchases would continue until the economy made “significant further progress” towards its maximum employment and annual inflation targets.
In a speech last month, Fed Chair Jerome Powell said such progress has already been met for inflation, with prices rising this year amid shortages of manufactured goods and materials ranging from cars and computer chips to paints and building materials.
Powell added that “clear progress” had been made in job growth and that it would be “appropriate” to reduce bond purchases this year if recruitment remained healthy. A surprisingly weak August jobs report underscores that the Fed will officially announce a cut in September and will probably do so in November or December.
The central bank may signal in a statement after its meeting on Wednesday that it plans to announce a slowdown in its bond purchases soon, and Powell may reinforce that message at a subsequent press conference.
“A dude in the October job report could change those plans,” said Michael Ferrell, economist at JPMorgan Chase and a former Fed employee.
On Wednesday, the Fed will also update its quarterly forecasts for growth, unemployment and inflation by 20224. It will also predict how its benchmark rate will change in 20224. In their previous such estimates in June, Fed officials collectively predicted that they would start raising their key short-term rates in 2023.
The Fed’s rate forecast is unlikely to be accurate, especially for 20224.
At his press conference, Powell will face a subtle task: he will try to signal that the Fed will soon begin withdrawing its economic stimulus, at the same time reassuring investors, consumers and business leaders that it will not remove the recovery so quickly. From the recession. And Powell must stress that buying a par – or “tapper” – bond doesn’t mean the Fed will soon start raising its benchmark rate, a move that will have a big impact on the economy over time.
Priya Mishra, head of global rates strategy at TD Securities, said:
One way to reassure investors is to give a relatively slow signal. The Fed is now buying $ 80 billion in Treasury and 40 40 billion a month in mortgage bonds. Many economists expect it to reduce Treasury purchases by 10 10 billion a month and mortgage-backed bonds by 5 5 billion. This means that the taper will take about eight months to complete.
But some regional Fed Bank presidents are concerned that the current high levels of inflation will remain good until 2022 and are pushing to end the taper by the middle of next year, so the Fed may start raising rates in the second half of 2022. These officers include James Bullard of the St. Louis Fed and Rafael Bostick of the Atlanta Fed.
And Fed Vice Chair Richard Clarida, a close Powell ally, surprised many observers last month that the Fed’s highest employment and 2% annual inflation target could be met by the end of 2022 – a sign that Clarida could then support rate hikes.
If this week’s update forecast envisions an initial rate hike sometime next year, it could mean that the rate hike will slow down sharply and suggest that the Fed is concerned about excess inflation. The Fed last began reducing bond purchases in December 2013, after the Great Recession. It took 10 months to reduce these purchases. The Fed then did not raise its short-term rate in December 2015 for more than a year.
A rapid taper and rate hike in 2022 will be a more aggressive schedule than financial market expectations.
David Wilcox, a senior fellow at the Peterson Institute for International Economics and former director of Fed research, said that while high inflation may have kept the Fed longer than initially expected, it could fade as the economy normalizes and requires higher interest rates.
“Putting back could be the right answer,” he said.
John Williams, president of the New York Fed, suggested last week that the Fed would not raise rates until it reached its maximum employment target. Although the Fed has not defined that goal, it is likely to have an unemployment rate below 4%. The unemployment rate in August was 5.2%.
“There’s still a long way to go,” Williams said.