Fed ready to ease, but wants more insight on market rate hike

The decision to call off, or taper, this month’s purchases has been so heavily telegraphed by Fed officials that the focus of the two-day meeting ending Wednesday has shifted to how they will characterize inflation risks—which This has a significant impact on how quickly they can raise interest rates.

The Fed will release its postmeeting policy statement at 2 p.m. Eastern Time. Fed Chairman Jerome Powell will hold a 2:30 p.m. press conference, here’s what to watch:

starting taper

Minutes of the Fed’s September 21-22 meeting indicated that the central bank would begin in mid-November to reduce its asset purchases by $15 billion a month. This would end the expansion of the Fed’s $8.6 trillion asset portfolio by June.

The Fed slashed its short-term benchmark rate to near zero in March 2020 as the coronavirus pandemic hit the US economy, and it has introduced a move in Treasury and mortgage securities, initially to stabilize financial markets, and later to hold longer. buying $120 billion a month. Term interest rates.

Fed officials don’t want to raise rates until bond purchases are over. Mr. Powell’s plan to close out those buys has slightly moved up, relative to earlier market expectations, as inflation has picked up this year. One question is if they want to raise interest rates before next summer, whether that could prompt them to further accelerate the pace of tapering.

inflation outlook

Strong demand for goods, disrupted supply chains, temporary shortages and spurt in travel have pushed 12-month inflation to its highest level in decades. Core inflation, which does not include volatile food and energy prices, rose 3.6% in September from a year earlier, according to the Fed’s preferred gauge.

Since April, the Fed’s post-meeting statements have characterized high inflation as “reflecting largely temporary factors.” Rates Committee.

Investors will also monitor how Mr. Powell portrays the risk around inflationary pressures. In recent public comments, he and other Fed officials have hinted at somewhat less confidence in how quickly price hikes will backfire for the central bank’s 2% target.

Two weeks ago Mr. Powell said, “The bottlenecks on the supply side have gotten worse.” “The risks are clearly now to longer and more permanent barriers, and thus to higher inflation.”

Since Fed officials last met, inflation data has shown both a possible extension of price pressure and the possibility that prices of some commodities such as used cars, which saw sharp gains earlier this year, rebounded. are increasing. While the data doesn’t contradict earlier expectations that some of the price increases linked to this year’s reopening of the economy from the pandemic will fade, it does at least extend to the long gap of higher inflation readings.

policy path

Higher inflation readings and policy pivots by other wealthy-nation central banks have caused bond investors to speculate that the Fed will raise rates next summer, when it stops buying bonds, and again later that year.

Mr. Powell is looking for a middle ground that reassures investors that the Fed is monitoring inflation risks closely, while not looking so concerned that it moves the markets towards an even sharper pivot. . Inflation-adjusted interest rates are expected to remain low, global asset prices have risen, and the Fed runs the risk of triggering new economic or financial stress by making sudden changes.

Investors will want to see how strongly Mr. Powell pulls back or confirms against market rate expectations. The Fed last year set a test to raise interest rates that would require inflation to moderately exceed 2%, while the labor market broadly returns to at least the levels that prevailed before the pandemic. commensurate with the employment conditions.

As that first test appears likely, Mr. Powell’s outlook for the labor market in 2022 may offer a way to meet rate-growth expectations. For example, suggesting that the economy may reach maximum employment in the second half of next year would support expectations of a market rate increase.

curb inflation expectations

Mr. Powell also raised the possibility that the Fed could raise rates even if the economy still falls short of its labor-market objectives, in the event households and businesses begin to expect higher inflation for the foreseeable future. .

The Fed places tremendous importance on inflation expectations because it believes they can become self-sustaining. Officials have said based on their forecasts that high inflation will subside on its own as it is closely related to the pandemic, which they also expect to have a beginning, middle and end. Even if they are ultimately correct about this, they will face more difficult policy deliberations next year if higher inflation is raising inflation expectations.

Mr Powell could shed more light on how officials are thinking through these potentially uncomfortable scenarios.

This story has been published without modification to the text from a wire agency feed