Federal Reserve expected to signal future financial support recession
Washington – The Federal Reserve Board is clear this week on starting to curb ultra-low interest rate policies, the first step in unleashing the extraordinary support given to the economy since the pandemic hit 18 months. Should send a signal. before.
Many economists believe the Fed will officially announce its withdrawal in November in response to a steady resumption of the pandemic recession and accelerating inflation that is causing widespread concern. The Fed’s policy meeting this week could lay the groundwork for its announcement.
At the end of the meeting on Wednesday, Fed officials are expected to keep benchmark short-term interest rates, which affect many consumer and business loans, close to zero. They also have the potential to maintain $ 120 billion in monthly bond purchases aimed at curbing long-term lending rates. In December, the Fed announced that it would continue to make these purchases until the economy makes “further substantial progress” towards its targets for maximum employment and inflation of 2% on average per year.
In a speech last month, Federal Reserve Board Chairman Jerome Powell said prices had skyrocketed this year due to a shortage of products and parts ranging from automobiles and computer chips to paints and building materials, and inflation is already there. He said such progress has been made.
Powell also said job growth has made “clear headway” and if employment remains healthy, it “may be appropriate” to start cutting bond purchases this year. paddy field. August’s surprisingly weak jobs report made it less likely that the Fed would officially announce cuts in September, and more likely in November or December.
The central bank could indicate in a statement released after Wednesday’s meeting that it would soon announce a slowdown in the pace of bond buying, and Powell could reinforce that message at a press conference.
“Unexploded ordnance from the October Jobs Report could change those plans,” said Michael Ferroli, economist at JPMorgan Chase and former Fed staffer.
The Fed is also updating its quarterly forecasts for growth, unemployment and inflation through 2024 on Wednesday. It also provides forecasts for the development of benchmark rates in 2024. In 2023, we will start raising the main rates short-term interest. The forecast, updated this week, could predict the first rate hike by the end of 2022.
The Fed’s interest rate forecast is not accurate, especially for 2024. However, it can give some insight into how quickly policymakers think they need to raise interest rates in the years to come. .
At his press conference, Powell will face a subtle challenge: he signals the Fed to start withdrawing its stimulus soon, while urging investors, consumers and business leaders to hamper the recovery. Rest assured that he will not come out of the recession. Powell points out that cutting bond purchases or moving to “tapering” does not mean that the Fed will start raising benchmark interest rates anytime soon. This is a step that will have a significant impact on the economy over time.
Priya Misra, Head of Global Interest Rate Strategy at TD Securities, said:
One way to reassure investors is to show a relatively slow rate of reduction. The Fed currently buys $ 80 billion in Treasury securities and $ 40 billion in mortgage bonds each month. Many economists expect Treasury purchases to be cut by $ 10 billion per month and mortgage-backed securities by $ 5 billion. This means that it will take about 8 months to complete the cone.
However, the Fed is at the end of 2022, as some regional Fed bank chairmen fear the current high inflation levels will continue into 2022 and are calling for an end to the reduction by mid-July. next year. We can start increasing the rates. Features James Bullard of the St. Louis Fed and Raphael Bostic of the Atlanta Fed.
And Powell’s close ally, Fed Vice President Richard Clarida, surprised many observers last month by suggesting that the Fed’s targets of maximum employment and 2% annual inflation could be met. by the end of 2022. ..
If this week’s updated forecast sees the first rate hike next year, that means rate hikes will fade soon, suggesting the Fed is worried about excessive inflation. The Fed last started cutting its bond purchases in December 2013 after the Great Recession. It took me 10 months to reduce these purchases. The Fed did not raise short-term interest rates until December 2015, more than a year later.
The rapid cut and rate hikes in 2022 will be a more aggressive timeline than financial markets currently anticipate.
David Wilcox, senior researcher at the Peterson Institute for International Economics and former Fed research director, said the economy has normalized, although inflation may continue to be higher than the Fed initially expected. . He said he could decline like he did. I need a higher interest rate.
“Restraint may be the right answer,” he said.
New York Fed Chairman John Williams suggested last week not to raise rates until the Fed hits its maximum employment target. The Fed has not set this target, but the unemployment rate may be below 4%. The unemployment rate in August was 5.2%.
“There is still a long way to go,” said Williams.
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