The Federal Reserve Board may sound more worried about the virus and may not be ready to tighten its policies

Federal Reserve Board Chair Jerome Powell testifies at a hearing of the US Housing Surveillance and Reform Selection Subcommittee on the Coronavirus Crisis on June 22, 2021 at Capitol Hill, Washington.

Graeme Jennings | Pool | Reuters

When the Federal Reserve Board of Governors breaks out of its July meeting, it may sound a bit more likely to maintain its super-simple policy than was expected just a few weeks ago.

The Federal Reserve Board of Governors Rapidly expanding delta variant Of the coronavirus. The market was waiting to hear from the Fed about plans to reduce bond purchase programs, the first major step in policy easing.

“This was supposed to be a meeting where they really focused on tapering,” said Mark Cabana, head of the Bank of America’s US short-term interest rate strategy. “I think Powell sounds dovish-neutral, at least from an interest rate market perspective, because the market will eventually sound dovish, mainly because we continue to talk about downside risks from Covid,” he said.

The Federal Reserve Board will issue a statement Wednesday at 2:00 pm EST, following the two-day meeting.Chairman Jerome Powell Talk to the media at 2:30 pm

Federal Reserve Board expects officials Discuss tapering At least $ 120 billion in monthly purchases of Treasury and mortgage-backed securities. They also expect it to move in the direction of weakening the wind within the time frame of the end of this year or the beginning of next year.

Powell is also expected to stick to the view that the recent surge in inflation is temporary and will decline as supply chain problems resolve after the surge in demand and spending.

“In a statement from the FOMC, they talk about how the course of the economy depends on the course of Covid,” Cabana said. “So they will sound cautious, of course. They will talk about tapering, but given the fact that they have to be aware of the increased downside risk, it will look formal. . “

Tapering timing

It is widely expected that the Federal Reserve Board will begin serious discussions on bond purchase rollbacks in late August at the Jackson Hole symposium or September meeting. The slowdown in purchases was expected to begin by the end of the year.

However, Cabana expects the Fed to begin tapering early next year, cutting both mortgage and Treasury purchases evenly over a 10-month period.

“I think Covid’s resurgence will push back the idea that they will start declining in the fourth quarter,” he said. “I think we all can agree if we live with Covid longer than we thought we would be much less concerned about inflation because demand could decline. In that context, really one. I think there is … the important thing is the world and that is the path of this virus. “

Mr Cabana said he hopes the Fed will suggest delaying bond purchases at its September meeting. He’s also looking for Powell that purchases don’t have to be mechanical and the Fed can slow or speed them up as needed.

The Federal Reserve Board is widely expected to take a year to close the purchase, at which point it may be possible to raise interest rates. The forecast is that there will be two rate hikes in 2023.

Grant Thornton’s Chief Economist Diane Swonk said, “We must admit that the Delta variant adds much more uncertainty about the outlook. Be very careful with the words he uses. I have to do it. ” Economists said the delta variant has not yet appeared in economic data, but it may.

“The problem is that it’s now harder to solve these supply chain problems,” she said. “It may also weaken demand … you wouldn’t be surprised to see people canceling their entry into the restaurant.”

NS The Centers for Disease Control and Prevention on Tuesday was expected to recommend Even vaccinated people need to wear masks indoors in areas with high Covid infection rates. The real risk to the economy is whether the spreading varieties delay reopening or keep schools closed.

Squonk said the Fed is talking about tapering, and some members are encouraging it sooner or later. But if a variant of Covid begins to affect the economy, it can affect the debate.

“It may change their taper timeline. They don’t want to change anything yet because they want to see what happens first,” she said. “The biggest advantage of tapering is whether financial markets can continue to function while experiencing this. It depends heavily on whether it will be easier to manage again according to the UK model.”

Jim Caron, head of global macro strategy for Morgan Stanley Investment Management, said he hopes Powell will sound the same as it did recently. Parliamentary testimony about the economy.

“As he said in his semi-annual testimony,’the situation is getting better, but it may still be far from reaching substantial further progress,'” Caron said. “They are about tapering. I think I’m talking, but he’ll be back with no decisions yet. “

The Federal Reserve Board may sound more worried about the virus and may not be ready to tighten its policies

Source link The Federal Reserve Board may sound more worried about the virus and may not be ready to tighten its policies

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