When will the Fed tapering start
Fed policy at a time of high inflation concerns. The analysis by Tiffany Wilding, Pimco's North American economist
Since the previous Federal Open Market Committee (FOMC) meeting in June, some new data suggests that U.S. economic activity has slowed more than many observers initially expected, due to renewed anxieties over COVID-19 and continued supply disruptions. chain. Despite this, the FOMC members expressed their intention at the September meeting to announce the first reduction in the monthly rate of bond purchases as early as the November FOMC meeting. The Federal Reserve also released a new Economic Projection Summary Paper (SEP), which includes a substantial upward revision of the Fed's base inflation forecast for 2021 and an equally substantial increase in the expected average interest rate through 2023.
However, the Fed's new forecasts imply that the current high pace of inflation will fall back towards the central bank's long-term target of 2% in 2022. However, with above-target inflation appearing to be more persistent than as many observers initially believed, committee members seem to consider a faster rate of reduction justified. While longer-term inflation expectations currently appear to be consistent with the Fed's 2% target, more persistent inflation likely increases the risk that inflation expectations will rise, which in turn would justify a more aggressive tightening from part of the Fed. We believe the September projection revisions reflect the efforts of Fed officials to manage these risks.
Finally, with regard to bond purchases, although the FOMC has clearly expressed its expectations for a reduction from November, there is a risk that this will be delayed until December. The US Treasury debt ceiling is likely to become binding at the time of the November FOMC meeting, and the Fed may not want to contribute further to what is likely to be a period of high volatility. However, the Fed can easily adjust the pace of tapering to still end purchases "around the middle of next year," as President Jerome Powell pointed out at the press conference.
ECONOMIC IMPACT OF THE DELTA AND HURRICANE VARIANT
Since the June FOMC meeting, a new increase in coronavirus cases of the more contagious delta variant has slowed activity in the services sector, while similar outbreaks in emerging markets have created additional problems for suppliers and slowed production, in particular. in the automotive industry. Production disruptions caused by Hurricane Ida have also likely exacerbated logistics problems further, while damage, especially to vehicles, is likely to increase demand and prices in the coming quarters, largely due to low vehicle stocks.
Furthermore, these themes have prompted us to revise the prospects for US growth in 2021 downwards and to revise the inflation forecasts upwards. And while we continue to view the current inflation phase as being driven by factors that are expected to dissipate over the next year, we are also a little more concerned about further acceleration of inflation expectations over the longer term. According to the Fed's Common Inflation Expectations (CIE) index, inflation expectations appear to hover around the long-term target of 2%. However, if a series of transient factors (such as the recent hurricane) produce more marked and persistent inflation, inflation expectations are likely to accelerate further, requiring a more aggressive reaction from the central bank. While long-term inflation expectations have not yet shown this kind of trend, this is a risk the Fed is likely to mitigate.
SEPTEMBER FOMC FORECASTS FOR GROWTH AND INFLATION
Substantial revisions to the Fed's growth and inflation forecasts for 2021 have been met by an equally large increase in the average rate path expected through 2023. While moderation is still expected from the currently high level of inflation in 2022, the FOMC members have estimated a faster pace of hikes throughout the forecast horizon. The average SEP estimate for real GDP growth in 2021 was lowered to 5.9% (versus 7.0% in June), while real GDP in 2022 was increased to 3.8% (versus 3 , Previous 3%). The 2021 core PCE inflation average was revised to 3.7%, and the 2022 and 2023 averages increased by 0.2-0.1 percentage points, to 2.3% and 2.2% respectively. %. (The PCE, or personal consumption spending index, is the Fed's preferred measure of inflation; it is typically a few tenths of a percentage point lower than the CPI.)
These changes in forecasts have prompted Fed members to raise their projections for the interest rate path as well, and that includes the dovish members, who have shifted their expectations for the first rate hike to 2023, and the more dovish members. hawkish , which added further increases in 2022. Overall, this led to an average policy rate forecast of 0.25% for 2022 and 1.0% for 2023. The September SEP also introduced rate forecasts for 2024 with a median of 1.8%, indicating an estimated pace of three hikes of 25 basis points per year between 2022 and 2024.
THE BUDGET OF THE FED
Against this backdrop of growth and inflation, President Powell confirmed that the FOMC still plans to announce the first reduction in the monthly bond buying pace at its November meeting. However, we believe the Fed will be limited in how quickly it can announce tapering from late October or early November, when the US Treasury debt ceiling becomes binding. In the past, market volatility has increased before these deadlines, and the Fed is likely planning the scenario where Treasury coupon payments are delayed or, at worst, Treasury auctions fail. As a result, we see the risk of the announcement being delayed until the December meeting. That said, we also see the possibility of the Fed announcing a faster pace of tapering than the $ 15 billion monthly cut we discussed earlier. Regardless of whether the Fed starts tapering in November or December, we believe it can easily adjust the pace of tapering to end the bond buying program by mid-2022. Also, this will give the Fed more flexibility to raise rates sooner. in the event that inflation expectations accelerate and inflation proves to be more persistent.
IN CONCLUSION
High risks to inflation expectations appear to have prompted Fed officials to revise their rate hike projections higher. Previously, dovish members revised their expectations for rate hikes to begin until 2023, while more hawkish members surprisingly expected further hikes.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/quando-partira-il-tapering-della-fed/ on Sun, 26 Sep 2021 07:00:04 +0000.