Cliffhangers are not Powell Fed’s style.
Economists believe Fed Chairman Jerome Powell has turned the plot of next week’s meeting. In two days of testimony to Congress last week, Powell opened the door for the central bank to announce that it was doubling the monthly pace of asset purchases from $15 billion to $30 billion — rather than mid-March. In line with the end of quantitative easing in mid-June.
“Powell’s being so open and clear in his comments last week was very strong guidance that he’s going to accelerate the tapering off,” said Cathy Bosjanic, chief US financial economist at Oxford Economics.
The Fed only adopted the $15 billion momentum in early November.
“Change seemed impossible a month ago, just six weeks after the Fed’s tapering announcement, but signs are growing and market conditions are supportive,” said Ryan Boyle, senior economist at Northern Trust.
What happened? The surprising strength of inflation has given the Fed “sticker shock” in October. With inflation at a 30-year high above 6%, Fed officials want to be prepared to raise interest rates if necessary. The central bank still doesn’t want to raise rates while buying securities – which is tantamount to hitting the accelerator and the brakes at the same time.
According to economists and traders, the latest reading on November consumer price inflation will come on Friday and the uptrend in price levels may be higher than the previous month.
Traders gear up for next CPI reading
During his testimony last week, Powell also previewed a significant change in the central bank’s messaging.
From last year, the Fed’s strategy assumed that inflation would lag and the Fed could patiently nurture the labor market at full force, a process known as “maximum employment.” In short, the Fed wanted to bring the unemployment rate back to below 4%, where it was in early 2020.
But high inflation has thrown these plans into disarray.
The Fed’s new message is that the best way to achieve full employment is to keep inflation low and stable.
“The risk of persistently high inflation is a major risk of a return to a stronger labor market,” Powell said.
“Pending what’s on COVID, brace for early spring for a Fed rate hike,” said Michael Gregory, deputy chief economist at BMO Capital Markets.
Barclays economists are now looking at three rate hikes coming in March, June and September next year.
Economists, on the other hand, note that being prepared to raise rates and actually pulling the trigger are two different things.
TD Securities holds to the view that inflation and growth will slow significantly over the next year, barring any rate hikes through the end of 2023.
In the short term, the real impact for the economy from the Fed’s pivot will be tighter financial conditions.
Stocks or investors, the Fed’s move away from easing would mean a dire financial situation, Bostjancic said.
Signs of this have already been visible, with increased volatility, some weakness in stocks tied to lower interest rates. And a stronger dollar. Bostjancic said that at some point down the road, dire financial conditions could serve as a brake on the higher highs the Fed could raise its benchmark interest rate. But that is a story for another day.
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