The tapering is coming. Everything indicates that the chairman of the Federal Reserve, Jerome Powell, will announce this Wednesday the reduction of purchases. Or, at least, that’s how the market discounts it.
Both Pimco and Bank of America expect the US central bank to announce a reduction in the volume of purchases of around 15,000 million dollars.
“It would end the program for the FOMC meeting in mid-June 2022,” he explains. Tiffany Wilding, Pimco’s US economist.
Of these 15,000 million dollars, 10,000 million would correspond to treasury bonds and the remaining amount, 5,000 million, to paper backed by mortgages. The Fed buys bonds worth $ 120 billion a month.
The Fed will send a message of real concern if it raises this figure above $ 15 billion.
The focus will be on inflation
Once the labor market is on track, bordering on full employment, the Fed will turn its focus to inflation.
In this sense, Wilding confirms that from Pimco they have “raised even more inflation forecasts as a result of a hurricane and new interruptions in the supply chain in China, and now we expect inflation to remain high until the third quarter of next anus”.
This is in contrast to the message of Powell, who had to rectify his forecast on prices, admitting that inflation will remain high until the second quarter of 2022.
By the end of the year, prices could be as high as 3.4 percent in the United States.
However, for Wilding, “this longer period of high inflation increases the risks that long-term inflation expectations will also be adjusted upward, something the Fed will want to avoid.”
Risk of an early rate hike
The main risk that inflation will remain high and no longer on a temporary basis means that the possibility of an early rate hike will take on more force.
It would not be the first time, since the Fed, in that sense, has been announcing small advances. Thus, in summer he made a first statement in which he anticipated the first rate hike from 2024 to 2023.
For its part, the panel of economists points out that the possibility that we will see the first upward movements in 2022.
And, again, the evolution of inflation will be key here. If there is a risk that it will be transferred to salaries, they explain from Bank of America, and the outlook remains on the upside, the US central bank will not hesitate to act.
In fact, operators anticipate that there will be two rate hikes in 2022.
Beyond inflation, the data also calls for tapering
Are inflation fears the Fed’s only driver right now?
The truth is that no. As Christian Scherrmann, US economist for DWS points out, “recent economic data, apart from inflation figures, support the start of debt reduction.”
Likewise, financial conditions remain at record highs and the supply side of the economy is also posting moderate but steady gains in production, despite global headwinds.
Add to this Ben Laidler, market strategist at eToro, that third-quarter earnings have reminded that growth so far is strong and companies are offsetting cost pressures.
The “wall of worry” has dissipated, from the Chinese housing market to the tax hike in the United States. The new all-time highs have cut the narrative too bearish, “he says.
Still, there are three risks in the meeting: that Powell recognizes higher inflation risks or that the reduction in purchases is higher than expected.