This is when the Fed’s “thinning” begins, and why you should care

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Washington Mariner S. Eccles Federal Reserve Building.

Stephanie Reynolds / Bloomberg via Getty Images

The Federal Reserve Board may begin to step into the unknown by the end of the year.

Central bank officials showed on Wednesday they were ready to begin the process of gradually withdrawing incentives provided during the pandemic, “cone.”

The Federal Reserve Board has entered a policy withdrawal before, but it hasn’t had to back down from such a dramatically accommodating position. It has bought at least $120 billion worth of bonds every month over the past year and a half, providing unprecedented support to financial markets and the economy and is now beginning to decline.

According to central bank data, bond purchases have added more than $4 trillion to the Fed’s balance sheet, reaching $8.5 trillion currently, of which about $7 trillion is bought through the Fed’s quantitative easing program. had gone. This is a property. The buying helped keep interest rates low, helped markets that were severely battered at the start of the pandemic crisis, and was in line with strong stock market movements.

In light of the program’s role, Federal Reserve Board Chairman Jerome Powell assured the public Wednesday that the central bank’s targets for employment and inflation “will remain adjusted until policies are reached.”

So far, the market has taken the news well, but the real test lies ahead. The taper, which appears to be at least a year away, represents a future rate hike.

“I don’t think it will shock anyone or cause market volatility,” said Cathy Jones, head of fixed income at Charles Schwab. .. “The problem is actually more than the property’s value” [interest] cost. Property prices are generally very well priced. What does it do with everything from simple money to property prices? “

The answer so far… was nothing. Despite the Fed’s pre-announcement, the market edged up on Wednesday afternoon and rose again on Thursday.

The rest of the way depends on how the Fed’s phase manages its withdrawal from the money printing business.

how to use

The taper looks like this:

Powell said the official taping decision could be made at a meeting in November, and the process would begin shortly thereafter. He said he was seeing the taper finish “around the middle of next year”. The timeline gives an idea of ​​how the actual deduction will be reduced.

If the taper does indeed begin in December, reducing purchases to $15 billion per month would cut the process to zero in eight months, or July.

Jones said the Fed expects to cut $10 billion per month and another $5 billion in mortgage-backed securities. There have been some calls from within the Fed to be more aggressive with mortgages in light of rising home prices, but that doesn’t seem to be the case.

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

Graeme Jennings | pool | Reuters

During the press conference after the conference, Powell’s general tone surprised Jones. He reiterated that he is pleased with the progress towards full employment and price stability. Inflation is well above the Fed’s comfort zone, and Powell said, “In my view, and in many other views, that part of the test has been achieved.”

“When it got diluted, the tone was probably a little louder than the market expected,” said Schwab’s Jones. “The comment that the Fed will end by the middle of next year is, well, if you’re going to do that, here you should go.” “”

Mr Jones said Powell’s comments and the Fed’s thin intentions reflect high levels of confidence that the economy will continue to recover from the shortest and fastest pandemic recession in US history.

“The Fed generally expects growth and inflation to be quite strong next year and says it is ready to roll back easing policies,” he said.

rate hike view

What happens after the taper is really important.

The summary of individual member rate forecasts (proud “dot plot”) showed a slightly aggressive attitude. Eighteen members of the Federal Open Market Committee are controversial as to whether to increase the points for the first quarter of next year.

Officials expect three more rate hikes in 2023 and 2024, with the Fed’s benchmark lending rate currently ranging from 0 to 0.25% to 1.75% to 2%. Powell stressed that the Fed is likely to proceed with caution before raising rates and waiting for the taper to complete, but the market is watching for more bullish signals.

“The next Fed meeting could be very interesting, which makes it even more volatile,” said John Farwell, head trader at bond underwriters Roosevelt & Cross. It must be expensive. “” They seemed more hurried. It is data-driven and will be about how COVID works. “

For investors, the Fed is still providing support, but it will be a new world, not as much as it used to be. The mechanics sound simple, but things could get complicated if inflation continues to exceed the Fed’s expectations.

FOMC members have raised their 2021 core inflation forecast to 3.7% from the June forecast of 3%. However, there are many reasons to believe that prediction has great advantages.

For example, recently, affordable companies such as General Mills and FedEx Express have shown that prices can rise. Natural gas has increased by more than 80% this year, reflecting significantly higher energy costs for the winter months.

UBS predicts that further easing economic conditions will begin to put upward pressure on yields, raising the benchmark 10-year Treasury to 1.8% by the end of 2021. That’s about 40 basis points from current levels, but he said, “there should be no significant negative impact. The impact on corporate and individual borrowing costs.”

Yields move at the opposite price. This means that investors will sell bonds in anticipation of higher interest rates and less Fed support.

Analysts at UBS say investors should keep in mind that the Fed is moving forward in order to trust and continue to support the economy.

“Higher bond yields make stocks less attractive, but the gradual increase in bond yields is more than offset by the positive impact of higher earnings as the economy returns to normal. It should be.” should be regarded as a gradual withdrawal.”

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This is when the Fed’s “thinning” begins, and why you should care

Source Link This Is When The “Tapering” Of The Fed Begins, And Why You Should Care

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