The Fed may become a tougher central bank and may end the bond program sooner

Federal Reserve Chairman Jerome Powell attends the House Financial Services Committee hearing on September 30, 2021, on Capitol Hill in Washington, USA.

Aldrago | Reuters

The Fed is expected to make more tough statements because it may consider ending its bond program sooner than expected.

Based on the comments of several Fed officials, market professionals now expect the Fed to discuss whether they should end their quantitative easing program more quickly at their meetings on December 14 and 15.

“They will accelerate their contraction in December, and it now appears that the growth may easily exceed 6%, and may be close to 7% in the fourth quarter,” said Grant Thornton chief economist Diane Swank. “The economy is strong and hot. This is not a bad thing. This is prosperity. You can’t escape it. The Fed must adjust.”

Even if it does not decide to reduce more bond purchases in December, the Fed’s tone should sound stronger than before in the post-pandemic era.

A tougher Fed

Fed officials announced Meeting in early November They will begin to slow down the debt purchase plan at a rate of US$15 billion per month, effectively ending the plan in mid-2022. Once the plan is completed, the Federal Reserve can begin to reduce its target federal funds interest rate from zero.

The minutes of the meeting released on Wednesday showed that some Fed officials wanted to speed up the reduction of assets. Many members said The central bank may need to raise interest rates faster If inflation continues to rise. The stock was sold after the meeting at 2pm.

“If they want any distance between reduction and takeoff, they need to exclude it. This makes sense. We have a strong economy,” Swank said.

San Francisco Fed President Mary Daly is considered a pigeon and is the latest official It was stated on Wednesday that the central bank may expedite the end of its monthly bond purchase program of $120 billion.

Over the past week, expectations for the Fed to raise interest rates have risen sharply, and Daley’s comments have pushed it up.

Peter Boockvar, Chief Investment Officer of Bleakley Consulting Group, said that the futures market now reflects a 66% chance of a 25 basis point increase in interest rates in May and a 60% chance of a third rate hike in December next year. . Other interest rates have also been rising, especially the 2-year bonds that are closely related to federal funds.

On Wednesday, the two-year yield was 0.64%.

Fed Governor Christopher Waller and Fed Vice Chairman Richard Clarida both mentioned speeding up the reduction process last week. Waller said last Friday The Fed should end purchases in April instead of June.

“Now at the December meeting this is a real thing, whether the Fed will make a decision to accelerate the reduction, or will they say they talked about accelerating the reduction,” Bukova said. He said that by December, the Fed will have more data showing more hot consumer inflation and a strong job market.

Fed’s balancing act

this Latest report It is core personal consumption expenditure inflation, which increased by 4.1% year-on-year in October, the highest level since 1991. Economists expect the November employment report will show more than 500,000 employment reports, which will be released a week from Friday.Weekly Unemployment Application It was 199,000, the lowest level since 1969.

But Vincent Reinhart, chief economist at Dreyfus and Mellon, does not expect the Fed to decide to speed up the downsizing.

“We are at a stage where market participants are surpassing themselves. All the Fed officials have done is to say that they want options available. I think they want to sound more hawkish in this situation,” Reinhardt said. “What happens if market participants think you don’t know anything about inflation and you are behind the curve…the paradox they fall into is to speak hard, they may not have to be so hard.”

He said that the Fed sounds like it is ready to fight inflation, but it will not be so tough that the market fluctuates too much. This is a balancing act.

“The fact that they cut $15 billion a month is already a precedent,” he said. “But I don’t think they will do this unless they want to send a very strong signal… Changing asset purchases will send a very strong signal because it is a blunt tool. They may not want to resort to help. That. If you’re just talking about moving the date a few months ahead, they won’t get much from it.”

President Joe Biden re-elected Fed Chairman Jerome Powell this week. His confirmation hearing is expected to be held in Congress next month, which should be an opportunity for him to sound tougher and emphasize that the Fed will do everything it can to curb inflation.

Boockvar said he expects the central bank to focus on the bond program before it needs to adjust its views on interest rates. In the past, with the end of the quantitative easing program, the market became unstable. “I think the Fed will focus on completing the reduction first, without causing any surprises. They don’t have to guess when to raise interest rates,” he said.

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