Announcement in September via as early as October. The past few weeks have seen expectations change rapidly about the Federal Reserve’s monetary policy moves with more and more board members pushing for tapering, the gradual reduction in asset purchases, to start as soon as possible. The latest round of economic feedback – with labor market in great health and inflation still at the top of many years – has strengthened this view and now the market is waiting for Jerome Powell to see if the president of the US central bank will be less accommodating than in the past. Tomorrow already a first test with Powell that he has scheduled in public speech, but the litmus test will be the Jackson Jole symposium at the end of August which traditionally marked watershed moments with announcements of turning points in monetary policy.
Meanwhile, the Wall Street Journal today reports that Fed officials are considering conclude asset purchases by mid-2022 if the economic recovery continues. In recent interviews and public speeches, many have supported this calendar, which would allow interest rates to be raised earlier than currently expected. Last December, the US central bank said it would continue the current pace of purchases until FOMC members concluded they had made “further substantial progress” towards the 2% average inflation and employment targets.
Fed exponents increasingly hawkish
The latest rounds of interviews and public commentary from FED officials show growing support for faster taper timing than markets expected just a month ago.
Christopher Waller, economist and board member of the Fed, as well as Fed bank presidents Eric Rosengren, Robert Kaplan and Jim Bullard have publicly called for the green light to taper as early as the September meeting. Raphael Bostic, president of the Atlanta Fed, supported the start of tapering between October and December, suggesting it could also favor an announcement in September.
This is a sizeable group of Fed officials who are not considered hawks, in fact in the past have been among the loudest advocates of a strong commitment by the Fed to support the economy at the start of the pandemic.
A little over a month after September meeting (21-22 September) what could change the cards and allow Powell & co. to stall again? The only unknowns at the moment could be a marked slowdown in the labor market in August or easing inflation readings. But to date, forecasts point more in the direction of inflation that will remain high over the next year. A Reuters poll last week found that September is the new consensus for the announcement of the tapering, while until a month ago the clock had moved to November.
Taper tantrum avoided, Treasury rates under control
Powell has repeatedly remarked that he sees the surge in inflation as temporary. The central banker’s main objective in recent months has been to avoid a tapering tantrum, a repeat of the sharp sell-off in the bond market in 2013 triggered by Fed chairman Ben Bernanke who spoke of a possible reduction in asset purchases.
Powell appears to have achieved that goal with his Fed colleagues who have been talking openly about tapering for several months now and stocks rose and bond yields, while volatile, remained generally low. The 10-year Treasury rate travels in the area of 1.25%, down by about 10 points in the last two days also thanks to fears of an economic slowdown (US confidence collapsed to its lowest level since 2011 and weak Chinese economic data in July).