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The Fed should signal the end of its ultra-low interest rate policies

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WASHINGTON The Federal Reserve is expected to send its clearest signal yet this week that it will begin to curb its ultra-low interest rate policies later this year, a first step towards unwinding the extraordinary support it has brought to the economy since the pandemic hit 18 months since.

Many economists believe the Fed will officially announce a withdrawal in November, in response to a steady resumption of the pandemic recession and accelerating inflation that has raised many concerns. The Fed’s policy meeting this week could lay the groundwork for this announcement.

At the end of their meeting on Wednesday, Fed officials are expected to keep their benchmark short-term interest rate, which affects many consumer and business loans, close to zero. They will also likely maintain their $ 120 billion in monthly bond purchases, intended to maintain long-term lending rates. In December, the Fed said it would continue these purchases until the economy has made further substantial progress towards its targets for maximum employment and average annual inflation of 2% over time.

In a speech last monthFed Chairman Jerome Powell said such progress has already been made for inflation, as prices have skyrocketed this year due to shortages of manufactures and components, cars and computer chips paint and building materials.

Powell also said clear progress has been made in job growth and if hiring remains healthy, it may be appropriate to start cutting bond purchases this year. A surprisingly weak employment report in August made it less likely that the Fed would officially announce a cut in September and more likely in November or December.

The central bank could signal in a statement it will issue after its meeting ends on Wednesday that it plans to announce a reduction in the pace of its bond purchases soon, and Powell could reinforce that message at a conference of press to follow.

A misfire in an October jobs report could change those plans, said Michael Feroli, an economist at JPMorgan Chase and former Fed staffer, but it would likely take something bad enough to derail them. now.

On Wednesday, the Fed will also update its quarterly projections for growth, unemployment and inflation until 2024. It will also provide a forecast of the evolution of its benchmark rate in 2024. In their previous tel estimate in june, Fed officials have collectively forecast that they will begin raising their short-term policy rate in 2023. This week, the updated forecast may predict the first rate hike by the end of 2022.

The Fed’s rate forecast is unlikely to prove accurate, especially for 2024. But it can provide a glimpse of how quickly policymakers think they will need to raise rates in the years to come.

At his press conference, Powell will face a delicate task: he will try to signal that the Fed will soon begin to withdraw its economic stimulus, while simultaneously reassuring investors, consumers and business leaders that it does not. will not act so quickly that it will derail the resumption of the recession. And Powell will surely point out that a decision to cut or cut its bond purchases doesn’t mean the Fed will start raising its benchmark rate soon, a step that would have a bigger impact on the economy over time.

It needs to strike the right balance between continuing to be accommodating, while heading for the exit, said Priya Misra, head of global rates strategy at TD Securities.

One way to reassure investors would be to signal a relatively slow rate of reduction. The Fed now buys $ 80 billion in treasury bills and $ 40 billion in mortgage bonds every month. Many economists expect him to cut treasury purchases by $ 10 billion per month and mortgage-backed bonds by $ 5 billion. This would mean that the cone would take about eight months.

But some regional Fed bank chairmen are concerned that current high inflation levels will persist until 2022 and are pushing for the cut to end by the middle of next year, so the Fed could start raising rates in the second half of 2022. Those officials include James Bullard of the St. Louis Fed and Raphael Bostic of the Atlanta Fed.

And Fed Vice Chairman Richard Clarida, a close ally of Powell, surprised many observers last month by suggesting that the Fed’s targets of maximum employment and annual inflation of 2% could be reached by the end of 2022, a sign that Clarida could then support a rate hike.

If this week’s updated forecast sees a first rate hike next year, that would mean that a rate hike would quickly follow the cut and suggest the Fed is worried about excessive inflation. The last time the Fed started cutting its bond purchases was in December 2013, after the Great Recession. It took 10 months to reduce these purchases. The Fed then did not raise its short-term rate until more than a year later, in December 2015.

A rapid cut and rate hike in 2022 would be a more aggressive timeline than financial markets now expect.

David Wilcox, senior researcher at the Peterson Institute for International Economics and former director of research at the Fed, said that while higher inflation may persist longer than the Fed initially expected, it could still fade away at as the economy normalizes, without demanding higher interest rates.

Holding back may be the right answer, he said.

John Williams, chairman of the New York Fed, suggested last week that the Fed wouldn’t hike rates until it hit its maximum employment target. While the Fed hasn’t set that target, it’s likely an unemployment rate below 4%. The unemployment rate was 5.2% in August.

There is still a long way to go, Williams said.

– The Associated Press

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