The Fed meeting on Tuesday began after a turbulent day in global markets over fears that Evergrande, the big Chinese real estate developer, could collapse and spread contagion outside China’s borders. The S&P 500 had its worst day since May, but stocks stabilized slightly on Tuesday as investors looked to the Chinese government for control.
“Are the markets or the price action of the last few days in China having an impact on their thinking? I guess that’s going to get into the discussion, but I still think they’re going to end up in one place. Where we were ultimately going, ”said Ryder.
He expects the Fed to cut its purchases at the rate of $ 10 billion in Treasuries and $ 5 billion in mortgage-backed securities once the cut begins.
What can move the markets
“Overall, tapering is probably not a market driven phenomenon,” said Anviti Bahuguna, head of multi-asset strategy at Columbia Threadneedle. She said on Wednesday that the focus would be on the Fed’s forecast and dot plot, the chart central bank officials use to present anonymous interest rate forecasts.
While the Fed’s abandonment of asset purchases may well be broadcast, strategists say its interest rate forecast could be a wildcard for the markets. The Fed’s inflation expectations would be close to that. In June, he forecast the personal consumption expenditure inflation index to be 3.4% this year, before falling back to 2.1% in 2022.
Also in its June forecast, Fed officials targeted the first two hikes in the target federal funds rate in 2023, but there is a risk that could change. Two executives were expecting the first hike in 2022, and many market professionals are betting on a hike by the end of next year.
“If we see two or three members change their mind, it can be a wonderful surprise. There is no such chance [Fed officials] So the risk is that 2022 and 2023 see more points, and the market starts to think that the rate hike cycle will start next year, ”Bahuguna said. The message would be that there would be a downside to stocks, which could lead to higher interest rates on the short end of the Treasury curve.
In June, the addition of points to the 2022 forecast came as a surprise and suggests that some members of the Fed see rising inflation as more than fleeting, she said. There is a risk that could reoccur if more Fed officials think inflation is more stable.
Powell has repeatedly stressed that he thinks the surge in inflation was temporary, but some officials within the Fed rejected the idea.
Consumer price index inflation has remained above 5% over the past three months, although momentum eased slightly in August.
Ryder doesn’t expect the Fed to change its 2022 interest rate forecast, although it is revealing its 2024 forecast for the first time. He added that long-term forecasts change frequently.
“I still think they can decrease and leave a window, so they have the option of raising rates and starting in 2022,” Reeder said. “I think they’re going to decouple the taper of rates, but that will give them the opportunity to really get into 2022, assuming employment continues to improve… but I don’t think they’ll pass on in any way. whether, shape or form is their raw material, in any way.
postpone rate hikes
Rieder said insisting on ending the bond buying program doesn’t mean that upcoming rate hikes will make the Fed hit more vulnerable.
But the bond market will still focus on projections for rate hikes and inflation.
“Powell will probably do his best to try to isolate the association between gradual cut and hike in rates,” said Mark Cabana, head of US short-rate strategy at Bank of America.
“We believe they are going to make slight adjustments to their overall economic and inflation forecasts,” Cabana said. “So we think they’re going to slow growth this year, given some softening in recent data. They are going to be marked by inflation, part of the consolidation that we are seeing. The real focus will be on the points. We still don’t expect any increases in 2022, but they will add 2024. We expect 2024 to see three more increases.
Rieder has been a supporter of the Fed’s decision to end its easing policies. He said Fed policy and the economy don’t work the way they used to.
“I think there is something important here,” he said. “For our generation we are used to soft data, monetary policy has generally been the engine of modulation … but soft data comes exclusively from the supply side which is unaffected by policy monetary.”
Demand is high, but the economy has slowed due to supply chain issues and shortages. By stimulating the economy with an easing policy, the Fed is adding to this dynamic.
Market professionals also expect Powell to be asked about recent reports that Fed officials are holding and trading securities. A close look at the financial information of CNBC officials revealed that three of them had similar assets last year that the Fed bought out, including Powell, who held municipal bonds. Boston Fed Chairman Eric Rosengren invests in REITs and corporate bonds owned by Dallas Fed Chairman Rob Kaplan. The transactions appear to be in accordance with the Fed’s rules, and the Fed is reviewing them.