Washington (AP) — The Federal Reserve Board is expected to send the clearest signal this week, but plans to begin curbing ultra-low interest rate policies later this year. The pandemic occurred 18 months ago.
Many economists believe the Fed will officially announce its withdrawal in November in response to a steady recovery from the pandemic recession and the accelerating inflation that is causing widespread concern. This week’s Fed policy meeting could lay the groundwork for its announcement.
When the meeting ends Wednesday, Fed officials are set to keep short-term benchmark interest rates, which affect many consumer and corporate loans, near zero. They also have the potential to maintain $ 120 billion in monthly bond purchases aimed at curbing long-term lending rates. In December, the Fed announced that it would continue to make these purchases until the economy made “substantial further progress” towards its goals of maximum employment and inflation of an average of 2% per year.
of Last month’s speechFederal Reserve Board Chair Jerome Powell said that inflation has already made such progress and prices this year amid a shortage of manufactured goods and parts, from automobiles and computer chips to paints and building materials. Said soared.
Powell also said that employment growth has made “clear progress” and that if employment remains healthy, it “may be appropriate” to start cutting bond purchases this year. rice field. NS Surprisingly weak August job report The Fed is less likely to officially announce reductions in September and more likely to announce them in November or December.
The central bank could indicate in a statement released after Wednesday’s meeting that it would soon announce a slowdown in the pace of bond purchases, and Powell could strengthen that message at a press conference.
“The unexploded ordnance of the October employment report could change these plans,” said Michael Ferroli, an economist at JPMorgan Chase and a former Fed staff member.
The Fed also updates its quarterly forecast for growth, unemployment and inflation through 2024 on Wednesday. It also provides forecasts of how benchmark rates will change in 2024. June quoteFed officials have put together a forecast to begin raising major short-term interest rates in 2023. The forecast, updated this week, could predict the first rate hike by the end of 2022.
The Fed’s interest rate forecasts are not accurate, especially for 2024. However, it can provide insight into the speed at which policy makers think they need to raise interest rates in the coming years.
At his press conference, Powell will face a subtle challenge: he signals the Fed to soon begin withdrawing stimulus, while at the same time prompting investors, consumers and business leaders to hinder recovery. Reassure you that it won’t move from the recession. Powell emphasizes that reducing bond purchases, or moving to a “taper,” does not mean that the Fed will soon begin raising benchmark interest rates. This is a step that will have a significant impact on the economy over time.
Priya Misra, Head of Global Interest Rate Strategy at TD Securities, said:
One way to reassure investors is to show a relatively slow pace of tapering. The Fed currently buys $ 80 billion in Treasury securities and $ 40 billion in mortgage bonds each month. Many economists expect Treasury purchases to be reduced by $ 10 billion a month and mortgage-backed securities by $ 5 billion. This means that it will take about 8 months to complete the taper.
However, the Fed’s late 2022, as some presidents of the Fed’s regional banks are concerned that current high levels of inflation will continue into 2022 and are calling for an end to the taper by mid-next year. We may start raising rates. Includes James Bullard of the St. Louis Fed and Raphael Bostic of the Atlanta Fed.
And Powell’s close ally, Fed Vice-Chair Richard Clarida, surprised many observers last month suggesting that the Fed’s goals of maximum employment and annual inflation of 2% could be achieved by the end of 2022. ..
If this week’s updated forecast envisions the first rate hike sometime next year, it means that rate hikes will soon taper off, suggesting that the Fed is worried about excessive inflation. The Fed last started cutting bond purchases in December 2013 after the Great Recession. It took me 10 months to taper those purchases. After that, the Fed did not raise short-term interest rates until December 2015, more than a year later.
The rapid tapering and rate hikes in 2022 will be a more aggressive schedule than the financial markets currently expect.
David Wilcox, senior researcher at the Peterson Institute for International Economics and former Fed research director, said the economy normalized, even if inflation could continue to be higher than the Fed initially expected. He said it could decline as it did. I need a higher interest rate.
“Withholding may be the correct answer,” he said.
New York Fed President John Williams last week suggested not raising rates until the Fed reached its maximum employment target. The Fed has not defined that goal, but the unemployment rate can be less than 4%. The unemployment rate in August was 5.2%.
“There’s still a long way to go,” Williams said.
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