Fed Chairman Powell to try to appease markets, but that might not work

Federal Reserve Chairman Jerome Powell will try to avoid sounding hawkish in any way when he speaks on Wednesday afternoon about the Fed’s commitment to its easing policy, particularly its program of easing. purchase of bonds.

The Fed is not expected to take any action at its January meeting, and it will likely reaffirm its commitment to low interest rates and other easing policies when it releases its statement at 2 p.m. ET.

When Powell speaks at 2:30 p.m. ET, he should also acknowledge that the economy has slowed, consumer spending has weakened and the labor market has deteriorated since the December meeting.

“He’s going to say rates are staying low,” said John Briggs, head of global strategy at NatWest Markets. “We need more [stimulus]. We did not come out of the woods with the virus, and rates will remain low for a long time. There is still a lot of progress to be made. ”

The market is determined on what Powell will say about the Fed’s bond purchases, which is the subject of much speculation and which the Federal Open Market Committee was likely to discuss behind closed doors.

Stocks were hit on Wednesday with the Dow Jones down 1%.

The Fed buys $ 80 billion in treasury bills and $ 40 billion in mortgage securities each month. He is expected to cut back on these purchases when he feels the economy is strong enough.

CNBC’s Fed survey found that 60% of 32 Fed watchers polled expect policymakers to start cutting back on those purchases over the next 12 months, with most of them starting in November. But bond strategists say the market might be surprised by this at this point.

“I think I would focus more on the taper talk. If Powell puts it categorically, that’s one thing.
If he’s unpleasant, that’s another, “Wells Fargo director of interest rates Michael Schumacher said. Rates, which move in stark contrast to bond prices, have recently increased as some Fed officials, including the president of purchasing.

But Powell and Vice President Richard Clarida have decided to crush the speculation. Clarida said he expects to see the same pace of buying through the end of the year, and Powell said the Fed will start reporting on the program long before it starts to shrink. Yields were also improved by the prospect of increased government spending, but they have come down this week as the next fiscal stimulus package may be smaller than the one proposed.

Rick Rieder, director of global fixed income at BlackRock CIO, said he sees the economy recovering more than expected, even with weaker payroll data. He said glimpses of improvement were showing in things like the Philly Fed’s investigation and strength in manufacturing, housing and construction.

“I think in the second and third quarters growth will be significantly higher, and people will start to interpret that because the Fed is not going to hang around forever,” he said. “I think in June the Fed will start their discussion on tapering, and I’m not sure they actually start typing it this year. … I think there is a possibility.”

Rieder said the Fed will have to go slowly to introduce tapering to the market. He will also need to see how it is received and have the flexibility to reverse the price if there is a strong market reaction that suddenly drives interest rates up.

As for Wednesday, he expects Powell to back President Joe Biden’s $ 1.9 trillion stimulus package.

“They certainly won’t give numbers, but I think they will point out a number of things. First, the system can handle more fiscal policy and the Fed is willing and able to support it. [through bond buying and interest rates]”, did he declare.” The Fed is now the co-pilot of taxation, and I think it will do what it can to keep the policy well supported by monetary policy. “

The Fed is also expected to reaffirm that the course of the economy will be determined by the coronavirus.

Bank of America strategists say little is expected from this week’s Fed meeting, but they see a risk that the Fed will move markets. They don’t expect the Fed to cut its bond purchases until the second half of next year, but it could act sooner if there was a fiscal stimulus package early this year to help the economy.

“Markets have little expectation for this meeting, but probably view the Fed’s communication risks as asymmetric: it will be difficult for the Fed to appear more accommodating, but it will be easy for the Fed to appear more hawkish. risk of being hawkish, ”the strategists said in a note.