Faster Asset Purchase Taper, Economic Outlook top FOMC Agenda
The Federal Open Market Committee is expected to announce Wednesday a faster wind-down of the Federal Reserve’s asset purchases starting in January amid rising inflation.
The FOMC said Nov. 3 the Fed would reduce its Treasury purchases by $10 billion per month in November and December, alongside a $5 billion cut in each of those months in its purchases of mortgage-backed securities.
That lowered December’s purchases to $90 billion on a tapering pace that would end the buying by June.
But rising inflation is expected to force the committee to speed up that pace, a possibility raised by Fed Chairman Jerome Powell in recent congressional testimony.
The statement following Wednesday’s meeting, due for release, and Powell’s press conference beginning at 2:30 pm ET, are likely to mention the spread of the omicron variant of COVID-19 while suggesting it is too soon to know the full extent of its impact.
That leaves rising inflation and an improving employment picture for the FOMC to use to justify a faster taper pace. Analysts suggest the committee could trim its purchases by $20 billion in Treasuries and $10 billion in mortgage-backed securities starting in January.
“We expect the Fed to decide on Wednesday to reduce the volume of its monthly bond purchases by $30 billion instead of just $15 billion per month as before,” Commerzbank said in a research note.
“The Fed would then end its net purchases as early as March next year. From the investors’ point of view, this would clear the way for a first-rate hike in the middle of the year.”
Powell said in testimony before the Senate Banking Committee on Nov. 30 and the House Financial Services Committee on Dec. 1 that the Fed’s prior descriptions of inflation as “transitory” had become outdated given that price gains are likely to remain brisk at least through the middle of 2022.
As a result, Powell said, it would be “appropriate” to discuss accelerating the pace of tapering at the December meeting.
The Bureau of Labor Statistics reported Friday the US consumer price index rose 6.8% year-over-year in November, up from a 6.2% rate in October and the fastest 12-month rate since 1982.
Core CPI excluding food and energy rose was up 4.9% year-over-year after a 4.6% rate in October. This was the fastest pace since 1991.
US producer prices increased 0.8% in November for a record 9.6% gain year-over-year, the government reported Tuesday.
Also Wednesday, the FOMC will also release updated forecasts in its quarterly Summary of Economic Projections, which are expected to show a shift toward two rate hikes in 2022 from one suggested in the September SEP, as a faster end to asset purchases opens the door to additional rate increases next year.
Analysts expect FOMC members’ forecasts to show three more rate hikes each in 2023 and 2024, the same as suggested in the September SEP.
The emergence of the omicron variant is a wildcard for growth estimates, but inflation expectations are certain to be revised sharply higher and unemployment lower for 2022.
“At the December FOMC, we expect to see a sea change in the SEP dot plot alongside the accelerated taper announcement,” Morgan Stanley said in a research note.
“Near-term forecasts are likely to be revised higher, along with some adjustments to the trajectory for inflation and unemployment over the medium term.”
Powell is likely to express a more hawkish tone at his post-meeting press conference that justifies the acceleration in the pace of tapering, but he will be very careful to separate the decision on faster tapering from any suggestion that rate increases will begin sooner than previously expected.
Fed officials, including Powell, have frequently cited the much higher evidentiary standard for rate increases than for tapering, especially since employment remains below the Fed’s goals.
However, the officials have also said that the committee would act accordingly if inflation became an even bigger problem. This dichotomy is likely to be questioned during Powell’s press conference. # Faster Asset Purchase Taper, Economic Outlook top FOMC Agenda
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