Analysts eye US Fed meeting for signs of tapering
Updated
Analysts will be paying close attention to a US Federal Reserve meeting this week for insight on the future of the American and global economies.
Observers are watching for signals on when the banking regulatory body will ease back – or taper – its current policy of investing $120bn per month in bonds, to counter the global Covid-19 pandemic and boost interest rates.
The decision on interest rates could have a global ripple effect because many international investors seek capital from American financial institutions and foreign central banks often follow American trends.
Meeting held over two days
The Fed will discuss economic projections during a two-day meeting of its federal open market committee (FOMC) on Tuesday and Wednesday, 21 and 22 September.
The committee consists of 12 members, including all seven board of governors’ members, the president of the Federal Reserve Bank of New York, and four of the country’s 11 reserve bank presidents. The seven other reserve bank presidents participate in meetings, discuss policy and help assess the economy, but do not get to vote for decision-making purposes.
Possible November start
Some analysts have already offered predictions on when the Fed will act. Robin Brooks, chief economist for the Institute of International Finance (IIF), predicted the Fed will signal that tapering will start in November.
“We expect $10bn tapering per (Fed) meeting, with QE over by (September) 2022,” Brooks wrote on Twitter. “But a fast taper ($10bn per month) is possible, which would end QE by (June) 2022.”
The IIF represents 400 members in 70 countries. The group aims to support the financial industry in the areas of risk management and industry practices while advocating for regulatory, financial, and economic policies that foster global financial stability and sustainable economic growth.
Several other analysts have echoed Brooks’ prediction the Fed will begin to ease its pandemic-related stimulus efforts and low-interest-rate stance. But the November take-action deadline is not considered set as the Fed monitors American job-growth performance, which faltered in August.
Analyst: Economic projections important
In a research note, Raymond James analyst Larry Adam said he expects Fed chairman Jerome Powell to ‘stick to the same song and dance and defer the official announcement of plans to the November meeting.”
“Instead, the more important dynamic to observe will be the rhythm of the revisions to the Fed’s own economic growth, unemployment rate, and inflation forecasts,” Adam wrote, noting the Fed is choreographing its plans over several months.
With 2021 almost three-quarters over, he added, the market will have “a laser focus” on the Fed’s quarterly update to its 2022 economic forecasts. If projections remain consistent with the June estimates, which called for 3.3% economic growth in 2022, the backdrop for the economy and equity markets will remain favourable, Adam predicted.
“If the 2022 unemployment rate (June estimate: 3.8%) and core inflation (June estimate: 2.1%) are relatively unchanged, it would signal that the labour market is expected to edge closer to its pre-Covid levels and that the recent spike in inflation was truly transitory,” wrote Adam. “While there are questions surrounding the above-average growth rate for 2022, multiple undercurrents support this optimistic outlook.”
Taper tantrum avoided
Some analysts expect the Fed to hold off on tapering plans until at least December. Pensford Financial, a Charlotte, North Carolina company that offers its clients strategic recommendations on interest rates, said the start of tapering does not matter a whole lot.
“The Fed has done a masterful job of removing the risk of a Taper Tantrum 2.0, so whether it officially tapers in November, December, or January is largely irrelevant,” said Pensford Financial in a research note. “But the Fed will probably set the stage this week to expect a more formal statement about tapering soon.”
A taper tantrum refers to a spike in US Treasury bond yields that occurred in 2013 once the market learned of the Fed’s plans to stop its quantitative-easing programme in effect at the time.
Pensford expects the Fed to roll out its tapering programme over eight to 12 months. The company does not expect the regulator to begin hiking interest rates until a year after the tapering programme is complete.
Market appears skittish
But the market showed signs of skittishness over the upcoming Fed meeting on Monday 20 September as a massive sell-off occurred. The Dow Jones Industrial Average alone plunged 720 points around mid-day on the East Coast and other indices were down.
The nosedive was attributed largely to investor fears stemming from Chinese property developer Evergrande’s financial troubles. But concerns about the Fed meeting were also considered a factor.
“Times like these should act as a reminder of how powerful, fragile and volatile human psychology can be,” said Roensch Capital on Twitter.