Fed seeks to downplay rate hike outlook as gradual talks advance


The Federal Reserve is not expected to announce any major policy change after its meeting on Wednesday, but markets may be concerned about signals from the Fed that a change may be coming soon.

The Fed has indicated that it will likely start withdrawing its extraordinary monetary support before the end of the year. The Fed’s playbook calls first to slow down its asset buying program, followed by interest rate hikes across the board.

But Fed Chairman Jerome Powell has already let markets know that the timing of a so-called tap “will not be intended to send a direct signal” about the timing of possible rate hikes.

“Convincing the markets of this reality will be more difficult,” Deutsche Bank Research wrote in a September 17 memo.

Deutsche noted that Powell will face a “disentanglement dilemma” when the Federal Open Market Committee (FOMC) responsible for policymaking releases its updated set of “dot plot” projections, which will chart the course. possible interest rates through 2024. In June, the 18-member median committee member reported the likelihood of two 25 basis point rate hikes by the end of 2023.

Wall Street is scattered over whether or not the economic recovery since June will drag the FOMC down a more aggressive path to raise rates.

Deutsche and Evercore ISI, for example, expect the Fed to raise this forecast to three rate hikes in 2023. BofA Securities and Goldman Sachs see the Fed leaving its 2023 projection alone at two rate hikes. All four expect the Fed’s midpoint to show no rate hikes by the end of 2022.

Either way, Powell and the rest of the FOMC will likely try to dissociate the dot plot from any update on the Fed’s approach to slash its asset purchase pace by $ 120 billion per month. .

“It’s really important to point out that we have two different sets of metrics for taper and takeoff,” Fed Governor Christopher Waller told Yahoo Finance on Aug. 27.

The prevailing bet on Wall Street is that the Fed will use this week’s meeting to facilitate a possible announcement at its next meeting in early November. Data for August showing fewer than expected job gains and colder-than-expected price increases could cause Fed officials to wait a little longer before withdrawing support.

“I think November is a reasonable starting point, but the good news is that this is a Fed that thinks it has flexibility and options, so it doesn’t have to show its main for now and she’ll see how it goes, ”said Brian Levitt, Global Markets Strategist, Invesco.

Dark horses

One of the reasons the Fed is keeping its cards close to the chest is the prevalence of other risks that have surfaced since the last FOMC meeting in July.

The main downside risk remains the Delta variant, which may have weighed on the August data. Cases rose sharply in August, although the pace of new COVID-19 cases showed signs of slowing towards the end of this month.

But the dark horse risks have emerged just in the last few weeks.

Treasury Secretary Janet Yellen has warned of “widespread economic catastrophe” if Congress does not suspend the debt ceiling before the US Treasury runs out of cash to pay its bills.

A sharp market sell-off on Monday also highlighted U.S. concerns about the ripple effects of the possible failure of Chinese real estate conglomerate Evergrande. The struggling company may fail to repay some of its over $ 300 billion debt later this week, raising the specter of a possible systemic collapse in the world’s second-largest economy.

DailyFX analyst Christopher Vecchio said Powell won’t want to instill fear if he’s in a hurry on either risk during his press conference on Wednesday afternoon.

“It will be a wink and a nod,” Veccio told Yahoo Finance on Monday. “It wouldn’t be important. By making it important it would increase fear and it could actually make a sale worse that could jeopardize their best-designed discount plans. “

The Fed’s decision is expected Wednesday at 2 p.m. ET, followed by President Powell’s press conference at 2:30 p.m. ET the same day.

Brian Cheung is a reporter covering Fed, Economics and Banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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