Bloomberg economists said that as the U.S. economy recovers, the Federal Reserve is expected to start cutting the size of its monthly asset purchases by $120 billion by the end of this year.
Although this is a bit earlier than the forecast in the March survey, but this still means that the Fed will keep the asset purchase program unchanged in the coming months, the first interest rate hike is also expected to remain until 2023. In contrast, the Bank of Canada turned hawkish last week, saying it will scale back its purchases of government bonds and may accelerate the timetable for interest rate hikes.
In fact, the Fed’s hawkish stance has shifted since March, when slightly more people thought tapering bond purchases was a 2022 event.
And in this survey, about 45% of economists expect the Fed’s Open Market Committee to announce a tapering of quantitative easing by the fourth quarter, with 14% expecting it to begin in the third quarter. This could come from the Federal Open Market Committee meeting in July or September, or Powell’s semi-annual testimony to Congress.
Others, however, think the tapering of QE will be slower, with Bloomberg economist Carl Ricardona saying.
“We predict that tapering of QE will begin in the first quarter of next year. Starting with the semi-annual testimony in July, and the Jackson Hole meeting, and through the second half of the year, the Fed will release a lot of signals on whether to raise rates.”
The Jackson Hole Economic Symposium has been considered an important meeting for releasing signals in the past. Successive Fed chairmen have typically delivered keynote speeches, and Powell has followed this tradition so far.
The Fed’s Open Market Committee will conclude its two-day meeting early Thursday morning Beijing time. The meeting is expected to keep interest rates unchanged, while reiterating that the purchase program will only be adjusted when the U.S. economy makes “substantial progress” toward employment and inflation targets.
Earlier Powell said that when the committee sees close to its economic goals, he will alert the market in advance. Economists say changes in Fed policy will depend on the actual economic reports to be released, not just the bullish forecasts of economists.
Gero Jung, chief analyst at Mirabaud Asset Management, said.
“Given the Fed’s insistence on focusing on ‘hard’ economic data rather than improving expectations, we think it is too early to taper quantitative easing. In our view, the Fed would like to see a series of very positive data, such as the March employment data, before it starts tapering.”
Recent economic data suggests the Fed’s view of a strong economic rebound this year: 916,000 new jobs were added last month, more than expected; the unemployment rate fell and inflation is expected to exceed 2% in 2021. Although the Fed’s Open Market Committee has been intentionally vague about how to define “substantial progress,” economists in the survey said the Fed will begin tapering its bond purchases when the unemployment rate is around 4.5 percent and inflation is 2.1 percent (as measured by the personal consumption expenditure price index).
The minutes of the Fed’s Open Market Committee meeting in March said it would take “some time” to make substantial progress. Lynn Reaser, an economist at Potomac Nazarene University, said in a survey response.
“The Fed is increasingly optimistic about the economy, but still thinks any hint of future tightening is premature.”
Most analysts expect the tapering of $80 billion in size U.S. debt and $40 billion in mortgage-backed securities to continue for 7-12 months.
In addition to tapering quantitative easing, the Federal Reserve may raise the real interest rate. A survey from economists found that the timing of the rate hike is faster than the Fed’s Open Market Committee predicted in March – although it is unlikely to raise rates until 2023, the benchmark rate could rise 50 basis points to 0.75% by the end of 2023 and to 1.25% by the end of 2024.
Scott Brown, chief economist at Raymond James Financial, said.
“The revised monetary policy framework announced by the Federal Reserve last summer is very different from the past. In the past the Fed would preemptively tighten policy to prevent inflation.”
The new framework means Fed officials are turning to actual data.
As for Powell’s re-election, current Fed Chairman Powell’s term will end in February next year. As with the March survey results, about three-quarters of economists expect Biden will re-elect him. In previous public appearances, Powell also dodged all questions about being asked whether he would be re-elected for another four-year term, saying he was willing to stay at the helm.
The survey also showed that strong economic growth has boosted economists’ expectations for the economic outlook, with nearly two-thirds of economists seeing upside risks to the economy. Some 26 percent believe the economy is roughly balanced, while 9 percent highlighted concerns about downside trends. In the economists’ view, the accelerated U.S. vaccination program, the fiscal stimulus and President Biden’s $2.25 trillion infrastructure and jobs plan all pose risks of economic overheating. said Joel Naroff, president of Naroff Economics.
“If a major infrastructure bill is passed, the Federal Reserve could raise interest rates sooner than expected. This would ensure that the economy keeps growing steadily long after the stimulus program ends and doesn’t have to keep interest rates low.”
The minutes of the last meeting showed that the Fed’s Open Market Committee may consider a slight adjustment to the excess reserve rate. About one-fifth of economists hope to make an adjustment at the April meeting, raising the rate from 0.10 percent to 0.15 percent.
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