Federal Reserve Jerome Powell testified during a Senate Banking Committee hearing on the “Quarterly CARES Act Report to Congress” on Capitol Hill in Washington, USA, December 1, 2020.
Susan Walsh | Reuters
Federal Reserve Chairman Jerome Powell will try to avoid looking crazy in any way when he talks Wednesday afternoon about the Fed’s commitment to its relaxation policies, especially its bond-buying program.
The Fed is not expected to take any action at its January meeting and will likely reaffirm its commitment to low interest rates and other easing policies when issuing the statement at 2 p.m.
When Powell speaks at 2.30pm ET, he is expected to acknowledge that the economy has softened, consumer spending has weakened and the labor market has deteriorated since the December meeting.
“He will say rates remain low,” said John Briggs, head of global strategy at NatWest Markets. “We need more tax [stimulus]. We did not leave the forest with the virus, and the rates will remain low for a substantial period. There is still much progress to be made. ”
The market is based on what Powell will say about the Fed’s bond purchases, the subject of much speculation, and something the Federal Open Market Committee could discuss behind closed doors.
Shares were hit on Wednesday by the Dow down 1%.
The Fed buys $ 80 billion in treasuries and $ 40 billion in mortgage securities each month. He expects to reduce these acquisitions when he considers that the economy is strong enough.
The Fed’s CNBC poll showed that 60% of the 32 Fed observers surveyed expect policy makers to begin repairing those acquisitions over the next 12 months, most starting in November. But bond strategists say the market could be negatively surprised by this at this time.
“I think I would focus more on the conical discussion. If Powell puts that down with emphasis, that’s one thing.
If he’s desperate, that’s another thing, “said Michael Schumacher, director of Wells Fargo. Rates, which are moving against bond prices, have risen recently, while some Fed officials, including Fed Atlanta President Raphael Bostic , mentioned the Fed’s potential to reduce its purchases.
But Powell and Vice President Richard Clarida have moved to prevent speculation. Clarida said she expects to see the same pace of acquisitions by the end of the year, and Powell said the Fed will begin communicating about the program long before it begins to shrink. Yields have also been raised by the prospect of rising government spending, but fell this week in the view that the next package of fiscal incentives could be lower than proposed.
Rick Rieder, global fixed income BlackRock CIO, said he sees the economy growing more than expected on a large scale, even with lighter payroll data. He said there are signs of improvement in things like the Philly Fed survey and strength in production, housing and construction.
“I think in the second and third quarters, the growth will be significantly higher and people will start to interpret that because the Fed will not be waiting forever,” he said. “I think in June, the Fed will start its discussion on reducing taper, and I’m not sure they’ll actually start cutting this year … I think there’s a possibility.”
Rieder said the Fed will have to go slow to introduce reduced content in the market. They will also need to see how it is received and have the flexibility to reverse the course if there is a strong reaction in the market that sends interest rates suddenly higher.
As of Wednesday, he expects Powell to support President Joe Biden’s $ 1.9 trillion stimulus program.
“They will certainly not give numbers, but I think they will indicate a number of things. One is that the system can manage several fiscal policies and the Fed is willing and able to support it. [through bond buying and interest rates]”The Fed is now the fiscal co-pilot, and I think they will do everything they can to keep the policy well supported by monetary policy,” he said.
The Fed is also expected to reiterate that the evolution of the economy will be determined by the coronavirus.
Bank of America strategists say they expect little from this week’s Fed meeting, but see a risk that the Fed will move markets. They don’t expect the Fed to cut its bond purchases until the second half of next year, but they could move faster if there is a fiscal stimulus package earlier this year to help the economy.
“Markets are waiting a bit for this meeting, but they probably think the Fed’s communication risks are asymmetric: it will be harder for the Fed to look more corrupt, but easier for the Fed to look more hakk. As such, markets may misinterpret President Powell’s talks at the risk of being insane, “strategists said in a statement.