Jerome Powell, Chairman of the US Federal Reserve, speaks during a House Subcommittee session on the Coronavirus crisis in Washington, DC, United States, September 23, 2020.
Stephanie Reynolds | Reuters
The odds are high, the Fed will move the markets this week, no matter how hard they try not to.
As interest rates and Recovery of the economyIn fact, the Fed’s easy policies have come into the spotlight, and the question is increasingly becoming when it will consider resolving them. Chairman of the Federal Reserve Board Jerome Powell Questions about the Fed’s low interest rate policies and asset purchases are likely to be raised during its press conference, following the two-day Fed meeting that concluded on Wednesday.
Powell doesn’t like to be specific, but what he’s saying could shake up the already volatile bond market, which in turn could drive stocks. It could particularly affect growth stocks, if bond yields start to rise.
“I think the last press conference, I think I saw it with one eye, and listened with one ear. That’s one I’ll be in tune with every word, and the markets will be tuned for every word,” said Rick Ridder, chief information officer at BlackRock Global Fixed Income. “If he doesn’t say anything, it gets the markets moving. If he says too much, he’ll move the markets.”
Reader said the briefing should be “exciting to see”, and a challenge for the Fed to begin changing communications about its policy. He said that investors would analyze every word. “This will be March madness” for the markets, he said, referring to the upcoming collegiate basketball tournament.
Powell clearly has the ball, and what he decides to say on Wednesday will dictate to him Edgy markets When might the Fed consider reducing its bond purchases and even raising interest rates from zero.
The FOMC will release its statement at 2 PM EST on Wednesday, after the meeting, and Fed watchers are expecting little change in text.
But the Federal Reserve also releases officials’ latest forecasts on the economy and interest rates. That may show that most officials will be ready to raise the federal funds target range from zero in 2023, and few members may even be ready to raise interest rates next year.
Said Mark Cabana, president of US short rate strategy company at Bank of America. “As a result, we believe that they will look less favorable than the market expects. We think they will likely show a rally at the end of 2023.”
Reader said the Fed has been steadfastly directing its easing programs, but that it now needs to start reporting its expectation of changing policy on both asset purchases and interest rates. He said the Fed has been explicit that it will provide ample time between when the call starts to change and when it acts.
He said, “The time has come.” Reader said his out of consensus view is that the Fed may start curtailing its bond purchases in September or December, and needs to start discussing that now. The Fed buys $ 80 billion a month in Treasurys and $ 40 billion a month in mortgages.
He also said that the Fed may also start raising short-term interest rates next year without hurting the economy. The Fed did not expect any rate hikes until after 2023, but this may change in its latest forecast.
“They cannot raise short interest rates this year, but there is no reason that you are entering the second and third quarter of next year they could raise short-term interest rates that contradict their expectations,” said Reader.
The Fed is meeting against the backward drop of price fluctuations in the more sober Treasury market. For the past six weeks, the 10 years return, Which affects mortgage rates and other loans, it rose from 1.07% to 1.64% last Friday. It was at 1.6% on Monday.
The yield, which moves with the opposite rate, was reacting to a more optimistic view of the economy, based on the vaccine rollout and Washington’s stimulus spending. It also responded to the idea that inflation could rebound with the economy turning back. Powell said the Fed expects to see only a temporary jump in inflationary measures in the spring due to lower prices during the economic shutdown last year.
“They have to initiate this connection … the markets are waiting for it,” Rader said. “Price and volatility in the marketplace because we haven’t heard their plan yet.”
Reader said the Fed may raise interest rates while it is still buying bonds. He said it may want to shift its purchases more towards the long end to keep long-term interest rates low, as it affects mortgages and other loans.
“In their economic outlook, the employment outlook for next year is likely to be 4%. If this is correct, why not? Raising short-term interest rates and draining some liquidity from the front of the yield curve is not a problem,” he said.
“It’s times like these that require creativity and innovation,” said Rader. “It was remarkably innovative. It provided a lot of liquidity to the system, the front end is awash with liquidity and the returns are very low, in an environment where you could have 7% growth this year.”
In the latest forecast, five of the 17 members predicted a rate hike in 2023, and only one predicted a rise in 2022. Fed officials present their interest rate forecasts anonymously, on a so-called point chart.
The Fed said it will continue to buy bonds until this is done It has made “significant progress” towards its goals.
Cabana said there may be a few officials now expecting a rate hike for 2022, but he doesn’t expect the Fed to embrace that yet. The federal funds futures market is pricing in roughly one high in 2022 and three highs by the end of 2023.
“You think if the market is pricing it in, and the Fed hasn’t delivered, the market should be disappointed. We actually think a lot of people in the market think the Fed is going to pull back, and the Fed will tell the market it’s a mistake,” he said. Cabana. We don’t think so. We think the Fed will maintain the option to put the market price in a more optimistic outlook. Is the Fed hoping the market is okay, or are they right? The Fed hopes the market is right because it wants to achieve its target in a timely manner. Closer. We don’t think the Fed will fight hard. “
Cabana said the Fed might say that “substantial progress is still some time away”. He said he expects the Fed at some point to change the duration of the bonds it buys and turn towards the long end to keep those rates, like ten years, from rising too much.