The Fed chief is facing a balancing act.
(Photo: Bloomberg)
Frankfurt The nervousness in the markets is not only due to the bad news about the Chinese real estate company Evergrande. Another point is the meeting of the US Federal Reserve (Fed) this week. Fed Chairman Jerome Powell will present the results on Wednesday evening, European time.
The question is when the Fed will finally act, i.e. reduce its bond purchases from the current $ 120 billion a month. The markets are more or less afraid of their own reaction here. Any word from Powell that sounds stricter or softer than expected can move prices.
The broad consensus is that the Fed chief has not yet started “tapering”, as the throttling of bond purchases is called, but has announced it indirectly.
The economist Michael Feroli of JP Morgan, for example, expects Powell to be relatively clear about a concept for the November meeting of how the Fed will scale back its bond purchases. This could be done, for example, by talking about significant improvements in the economy and the labor market, but waiting for more “evidence” of a stable recovery until purchases are adjusted.
Top jobs of the day
Find the best jobs now and
be notified by email.
Feroli expects purchases to be reduced by $ 15 billion per month from the current $ 120 billion per month, of which 10 billion will be in government bonds and 5 billion in securitized real estate loans. In purely mathematical terms, the “tapering” would be completed in eight months. It is important to note that these figures are always about net acquisitions, the replacement of expiring papers is likely to continue for a long time. In other words, after tapering, the Fed’s balance sheet has stopped growing, but it’s not yet shrinking.
Six rate hikes by 2024?
Another interesting question is how the “dots”, the forecasts made by members of the Fed’s Monetary Policy Committee, will develop. Feroli believes it is quite possible that the median of these forecasts will amount to an initial rate hike as early as the end of 2022, and there could be a total of six rate hikes by the end of 2024, each with a quarter of a percentage point.
Similarly, Franck Dixmier, the global bond chief of Allianz Global Investors (AGI), believes the Fed will “reaffirm” its message that a reduction in securities purchases is “imminent”. He stressed that the latest figures confirm the Fed’s thesis that increased inflation is a temporary phenomenon. And the economists at Deutsche Bank predict that Powell’s main message will be that if the tapering is to be postponed beyond November, the data will have to change surprisingly.
Ultimately, the markets are facing a major turnaround, which they had already initiated before the corona pandemic, but then had to break off again: In the future, the strong tailwind for the prices is likely to fade to a mild breeze – if nothing comes up.
More: Practical test for Powell.