Jerome Powell, chair of the US Federal Reserve, speaks at a House Select subcommittee on the Coronavirus crisis trial in Washington, DC, USA, September 23, 2020.
Stefani Reynolds | Reuters
Chances are high that the Fed will move markets this week, even if it does not try.
With rising interest rates and the recovery of the economy, the Fed’s easy policy is in the spotlight, and demand is growing when it considers turning it off. Fed Chairman Jerome Powell is likely to raise questions about the Fed’s low interest rate policy and asset purchases during its press conference, following the Fed’s two-day meeting that concludes on Wednesday.
Powell is different from being specific, but which he says could yield the already volatile bond market, and it could drive stocks again. It can hit growth stocks in particular as yields on bonds start to rise.
“I think the last press conference, I think I watched with one eye, and listened with one ear. This one I will be focused on every word, and the markets will be focused on every word,” said Rick Rieder, BlackRock’s CIO for global fixed income. “If he says nothing, it will move markets. If he says a lot, it will move markets.”
Rieder said the briefing should be ‘exciting to see’, and a challenge for the Fed to possibly start changing its communication on its policies. He said investors were going to analyze every word. “It’s going to be the March frenzy,” he said, referring to the highly anticipated collegiate basketball tournament.
Powell clearly has the ball, and what he decides to say on Wednesday will dictate to turbulent markets how soon the Fed can consider buying its bonds and even raising interest rates from zero.
Statement to stay mostly the same
The Federal Open Market Committee will announce its statement on Wednesday, after the meeting, at 14:00 ET, and Fed viewers expect little change in the text.
But the Fed is also announcing officials’ latest forecasts for the economy and interest rates. This may indicate that most officials in 2023 are prepared to increase the target rate for fed funds, and that some members may even raise rates next year.
“We think they will sound a little more optimistic, but still cautious. That said, we think it will be difficult for them to sound as thousand as it was just because the facts on the ground are improving,” said Mark Cabana. , head of US short-term strategy at Bank of America. “As a result, we think they’re going to sound a little less accommodating than the market expects. We think they’ll probably show a hike by the end of 2023.”
Rieder said the Fed is gradually getting to grips with its easing programs, but now it needs to start announcing that it will change its policy on both asset purchases and interest rates. He said the Fed was explicit in that it would give a lot of time between when he starts communicating with change and until he acts.
“It strikes me it’s time,” he said. Rieder said his opinion is outside the consensus that the Fed could start reducing its buying power in September or December, and he should start discussing it now. The Fed buys $ 80 billion a month from Treasury and $ 40 billion a month from mortgage loans.
He also said the Fed could also start raising short-term interest rates next year without hurting the economy. The Fed did not forecast any interest rate hikes before 2023, but that could change in its latest forecast.
“They can not raise the short-term interest rate this year, but there is no reason if you come in the second and third quarters of next year that they can raise short-term interest rates that do not match their forecasts,” Rieder said.
The Fed is meeting against a decline in volatility in the more typical treasury market. For the past six weeks, the The ten-year yield, which affects the mortgage rate and other loans, rose from 1.07% last Friday to a high of 1.64%. It was 1.6% on Monday.
The yield, which moves opposite price, responds to a more optimistic view of the economy, based on vaccine deployment and Washington’s stimulus spending. It also reacted to the idea that inflation could increase as the economy roared. Powell said the Fed would only expect a temporary jump in inflation measures in the spring due to lower prices during the economic strike last year.
“They need to start communication … the markets are waiting for it,” Rieder said. “The volatility of rates and the volatility in the market is because we have not yet heard their plan.”
Rieder said the Fed could raise interest rates while still buying bonds. He said he may want to shift his purchases more to the long term to keep interest rates low in the longer term as this has an effect on mortgage lending and other lending.
“In their economic forecasts, their employment forecasts for next year are likely to be 4%. If that’s right, why not? It’s not a problem to raise short-term interest rates and tap some liquidity out of the front end of the yield curve. , “he said.
“Times like these call for creativity and innovation,” Rieder said. “They were remarkably innovative. They provided so much liquidity to the system, the front end is abundant in liquidity and the returns are too low in an environment where you can have 7% growth this year.”
In the last forecast, five of the 17 members expected a rate hike in 2023, and only one predicted a 2022 hike. Fed officials give their rate forecasts anonymously, on a so-called dot.
The Fed has said it will continue its bond purchases until it makes ‘substantial progress’ with its targets.
Cabana said there may be some officials now predicting an increase for 2022, but he does not expect the Fed to accept it yet. The futures market for mutual funds amounts to almost one increase in 2022 and three increases by the end of 2023.
“You think if the market prices it, and the Fed does not deliver, the market should be disappointed. We actually think a lot of people in the market think that the Fed will push back, and the Fed will tell the market that it is wrong, he said. Cabana. “We do not think so. We think the Fed will retain the option to see the market price more rosy. Does the Fed hope the market is right, or that they are right? The Fed hopes the market is right because it wants its “We do not think the Fed is going to push back too hard.”
The Fed can say ‘substantial progress is still a long way off’, Cabana said. He said he did expect the Fed to change the duration of the bonds it buys at some point and move to the long run to prevent rates from rising too much, just like the ten years.