The Fed is unlikely to suggest any policy changes next week, even with a stronger economy

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The Fed is unlikely to suggest any policy changes next week, even with a stronger economy

Key Points

  • Clues about when the Fed will shift gears on policy are unlikely to come at its two-day meeting next week.
  • Instead, the central bank will release what may be “the most positive [statement] the Fed has made in quite some time,” wrote Andrew Hunter, senior U.S. economist at Capital Economics.
  • Officials are unlikely to get their hands on reducing bond purchases or raising rates.

Federal Reserve officials are likely to paint a solid picture of the economy next week without even suggesting future policy changes.

Investors are increasingly trusting central bankers when they say that even with the economy spinning at its hottest pace in nearly 40 years, they will not start taking policy measures away until it becomes clear that the recovery is on the verge of solid basis.

“The economic outlook is pretty good as long as the Fed keeps its foot on the pedal,” said Randy Frederick, Charles Schwab’s vice president of trading and derivatives. “The market has finally accepted that they will.”

The Fed has kept short-term lending rates near zero since the start of the Covid-19 pandemic and has continued to buy at least $ 120 billion of bond-related assets each month. Asset purchases have pushed the central bank’s balance sheet to nearly $ 8 trillion, or about double the level since the start of the crisis.

Financial markets, however, have been wary, with the strengthening of economic data by the day and inflationary pressures beginning to rise, the Fed may be forced to begin easing the accelerator.

“They provide liquidity that will boost economic recovery,” Frederick said. “The challenge was when they decided to retire.

Nice preview

There are unlikely to be any clues as to when that date might come when the Federal Open Market Committee, the central bank’s monetary policy arm, ends its two-day meeting on Wednesday.

Instead, the public is likely to receive a statement that “will strike a more optimistic tone about the economic outlook” that could “turn out to be the most positive the Fed has released in quite some time,” he wrote Andrew Hunter, senior economist at the US. Capital Economy.

Like many others on Wall Street, Hunter believes Fed Chair Jerome Powell and his cohorts are looking to improve their view of the economy, but note that there is some distance from the “significant further increase” benchmark that the FOMC has ‘to note in his recent statements after a meeting.

Powell recently caught the market’s attention when he told CBS “60 Minutes” that the economy had reached a “tipping point” in the recovery. But it also went on to highlight the steps that the labor market must take to ensure full employment that is inclusive across income, race and gender groups.

Similarly, the Fed chairman may want to be at least a little shy during his press conference after meeting on the future policy arc, especially on potential rate increases and withdrawals in purchase speed assets.

Powell said he would wire the taper. I think he’ll keep his papers next to his vest, waiting until the last possible moment, “said Tom Graff, head of fixed income at Brown Advisory.” I suspect that the telegraph will arrive this month, and besides I think the telegraph will arrive suddenly. ”

There is an informal consensus on Wall Street that Powell is likely to start talking about tapering this summer, with the expectation of a slight decline in bond purchases by the end of the year.

“They’ll want to drop off for a while before hiking and they’ll want to create some flexibility,” said Graff.

Possible simpler program

Goldman Sachs economist David Mericle said he saw “tapering tips” at some point in the second half of the year, starting in early 2022. He expects the initial drop to be $ 15 billion per meeting, compared to the $ 10 billion monthly velocity used by the Fed during its fall that began in 2014. The Fed meets eight times a year, so totals would be equivalent.

However, those details have not yet arrived.

“Despite the recent acceleration, we believe it is clearly too early for the FOMC to start suggesting tapering,” Mericle wrote in a client report. “Although President Powell has recently begun to describe the economy as a ‘tipping point’ … we do not think he means it as a sign of politics.”

If the Fed decides to start tapering this year, it could start raising rates as early as the end of 2022, according to Citigroup economist Andrew Hollenhorst.

“At April’s FOMC we expect to see some changes to the statement to suggest stronger data recently, but no new formal guidance on tapering. This could be the result of a strong press release for April and / or May, both of which will be released before the next meeting, ”wrote Hollenhorst.

According to the CME’s FedWatch tool, traders in the federal funds futures market are actually considering a small chance – 2.8% – of a rate hike at next week’s meeting. Forecasts increase slightly over the year, with a 10.5% probability reduced by the end of the year.

Looking further, the market is setting a fund rate of 0.23% by the end of 2022, or 16 basis points above the current level of 0.07%. This suggests a strong possibility of rate hiking. The end of 2023 indicates a pool rate of 0.42%, which is equivalent to another quarter percentage point increase.

 

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