Jerome Powell, president of the U.S. Federal Reserve, speaks during a House Select subcommittee on the coronavirus crisis hearing in Washington, DC, USA, on September 23, 2020.
Stefani Reynolds | Reuters
Chances are high, the Fed will move markets this week, no matter how hard it tries not to.
With rising interest rates and the rising economy, the Fed’s easy policies are in the spotlight and more and more people are wondering when to consider unleashing them. Fed Chairman Jerome Powell is likely to be asked questions about the Fed’s low interest rate and asset purchase policies during his press conference, following the two-day meeting of the Fed. Fed concluding Wednesday.
Powell is not specific, but what he says could affect the already volatile bond market and that, in turn, could boost stocks. It could especially affect growth stocks if bond yields start to rise.
“I think the last press conference, I think I looked at it with one eye and I listened with one ear. To this I’m going to tune in to every word, and the markets will be in tune to every word.” said Rick Rieder, CIO of BlackRock for global fixed income. “If he says nothing, he’ll move markets. If he says a lot, he’ll move markets.”
Rieder said the briefing should be “exciting to watch” and a challenge for the Fed to begin changing communications about its policy. He said investors will analyze every word. “This will be the March madness,” for the markets, he said, referring to the highly anticipated collegiate basketball tournament.
Powell clearly has the ball and what he decides to say Wednesday will dictate to nervous markets how long the Fed could consider amortizing bond purchases and even raising interest rates from zero.
Statement to stay almost the same
The Federal Open Markets Committee will release its statement at 2 p.m., Wednesday, following the meeting, and Fed observers expect few changes to the text.
But the Fed also publishes officials’ latest forecasts on the economy and interest rates. This could show that most officials would be prepared to increase the target range of funds fed from zero by 2023, and some members may even be prepared to raise rates next year.
“We think they’ll sound a little more optimistic, but still cautious. That said, we think it’s going to be hard for them to look as sweet as they’ve been just because the facts on the ground are improving,” said Mark Cabana, head of short-term strategy. in the US at Bank of America. “As a result, we think they will sound a little less accommodating than the market expects. We think they will probably show a rise by the end of 2023.”
Rieder said the Fed has constantly run its relaxation programs, but now it needs to start communicating that it expects to change both asset purchase and interest rate policy. He said the Fed has been explicit in that it would provide a lot of time between when it starts communicating change and when it acts.
“It makes me feel like it’s time,” he said. Rieder said his view outside the consensus is that the Fed could start delaying bond purchases in September or December, and that it should start discussing it now. The Fed buys $ 80 billion a month in treasury and $ 40 billion a month in mortgages.
He also said the Fed could also start raising short-term interest rates next year without hurting the economy. The Fed does not anticipate any rise in interest rates until after 2023, but that could change in its latest forecast.
“They can’t raise short interest rates this year, but there’s no reason for you to go into the second and third quarters of next year that could raise short-term interest rates that are inconsistent with their projections.” , said Rieder.
Rates are rising
The Fed is meeting against the backward fall in interest rate volatility in the more typically stabilized Treasury market. Over the past six weeks, the ten-year yield, which influences mortgage rates and other loans, has gone from 1.07% to 1.64% last Friday. It was up 1.6% on Monday.
Performance, which moves against price, has been reacting to a more optimistic view of the economy, based on vaccine deployment and Washington’s stimulus spending. He has also reacted to the idea that inflation could rise as the economy roars again. Powell has said the Fed expects to see a temporary jump in inflation measures in the spring due to falling prices during last year’s economic downturn.
“They have to start this communication … the markets are waiting for it,” Rieder said. “The jump in rates and market volatility is due to the fact that we have not yet heard their plan.”
Rieder said the Fed could raise interest rates while still buying bonds. He said he might want to change his purchases in the long run to keep long-term rates low as they affect mortgages and other loans.
“In its economic projections, its employment projections for next year will probably be 4%. If so, why not? Increase short-term interest rates and extract some liquidity in the front of the yield curve is not a problem, “he said.
“Times like these demand creativity and innovation,” Rieder said. “They’ve been remarkably innovative. They’ve provided so much liquidity to the system, the front is full of liquidity and yields are too low, in an environment where you could have 7% growth this year.”
In the latest forecast, five of the 17 members expected a rate hike in 2023 and only one predicted a hike in 2022. Fed officials provide their rate forecasts anonymously, in a so-called point chart.
The Fed has said it will continue its bond purchases until it makes “substantial progress” toward its targets.
Cabana said there could be some officials now predicting a rise for 2022, but he still doesn’t expect the Fed to adopt it. The fed funds futures market has prices close to a rise in 2022 and three at the end of 2023.
“Do you think if the market is setting a price like that and the Fed doesn’t deliver, the market should be disappointed. In fact, we think a lot of the market thinks the Fed will back down and the Fed will tell the market it’s wrong,” Cabana said. . “We don’t believe it. We believe the Fed will keep the option of having the market price in a more rosy outlook. Does the Fed expect the market to be right or is it right? The Fed expects the market to be right because it wants to achieve its “We don’t think the Fed can go back too far.”
The Fed could say that “there is still time to move forward,” Cabana said. He said he expects the Fed to change the length of bonds it buys at some point and move toward the end to prevent those rates, like the ten-year, from rising too high.