Federal Reserve Jerome Powell testified during a Senate Banking Committee hearing on “The CARES Bill’s Quarterly Report to Congress” on Capitol Hill in Washington, USA, on December 1, 2020.
Susan Walsh | Reuters
Federal Reserve Chairman Jerome Powell will try to avoid sounding deficient by talking Wednesday afternoon about the Fed’s commitment to its flexibility policies, especially its bond-buying program.
The Fed is not expected to take any action at the January meeting and will likely reaffirm its commitment to low interest rates and other easing policies when it issues its statement at 2 p.m. ET.
When Powell speaks at 2:30 p.m. ET, he is also expected to acknowledge that the economy has softened, that consumer spending has weakened, and that the labor market has deteriorated since the December meeting.
“It’s going to say rates will stay low,” said John Briggs, head of global strategy at NatWest Markets. “We need more taxes [stimulus]. We are not out of the forest with the virus and rates will remain low for a substantial period. There is still a long way to go. ”
The market is based on what Powell will say about Fed bond purchases, the subject of much speculation and something the Federal Open Markets Committee would likely discuss behind closed doors.
Shares were up 1% on Wednesday with the Dow down.
The Fed buys $ 80 billion in treasury and $ 40 billion in mortgages every month. They are expected to reduce purchases when they consider the economy to be strong enough.
The CNBC poll on the Fed found that 60% of the 32 Fed observers surveyed expect policy makers to start stopping these purchases in the next 12 months, most of them starting in November. But bond strategists say the market could be negatively surprised at this point.
“I think I’ll focus more on the tapered talk. If Powell puts that emphatically, that’s one thing.
If it’s desirable, that’s another one, ”said Michael Schumacher, Wells Fargo’s type director. Rates, which move against bond prices, rose recently as some Fed officials, including the Fed chairman of Atlanta, Raphael Bostic, mentioned the potential of the Fed to reduce its purchases.
But Powell and Vice President Richard Clarida went on to crush speculation. Clarida said she expects to see the same pace of purchases by the end of the year and Powell said the Fed will begin communicating about the program long before it begins to shrink. Yields were also high by the government’s more spending outlook, but have come down this week in view of the fact that the next package of fiscal stimulus may be lower than proposed.
Rick Rieder of BlackRock CIO’s global fixed income said he sees the economy growing more than expected, even with softer payroll data. He said there are hints of improvement in aspects such as the Philly Fed survey and strength in manufacturing, housing and construction.
“I think in the second and third quarters, growth will be significantly higher, and people will start to interpret that the Fed won’t stay on hold forever,” he said. “I think in June, the Fed will start its discussion on volume reduction and I’m not sure they’ll really start the reduction this year … I think there’s a possibility.”
Rieder said the Fed will have to go slowly to introduce the market downturn. You will also need to see how it is achieved and have the flexibility to reverse course if there is a strong market reaction that causes interest rates to suddenly rise.
As for 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 point to several things. One is that the system can manage more fiscal policy 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 course of the economy will be determined by the coronavirus.
Bank of America strategists say little is expected of this week’s Fed meeting, but they see the 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 it could move forward sooner if there is a fiscal stimulus package earlier this year to help the economy.
“Markets expect little at this meeting, but they are likely to see the Fed’s communication risks as asymmetric: it will be difficult for the Fed to sound more obvious, but for the Fed to look more deficient. As such, markets may misinterpreting President Powell’s discussions risks being baffling, ”strategists said in a note.