Fed to Taper Asset Purchases in 2022 or Later, Say Economists
(Bloomberg) -- Federal Reserve officials meeting next week are likely to put off any changes in their bond-buying program until 2022, when a tapering of purchases may begin, according to economists surveyed by Bloomberg News.
About 88% of the 40 respondents to a Jan. 15-20 questionnaire said the Federal Open Market Committee’s next move will be to shrink purchases gradually rather than to increase their pace.
The FOMC has its first meeting of 2021 on Jan. 26-27, a week after the inauguration of President Joe Biden, who is asking for $1.9 trillion in additional fiscal stimulus to help the coronavirus-ravaged economy. More support, on top of the $900 billion package signed into law by outgoing President Donald Trump, has boosted prospects for growth and inflation, while improving the outlook for unemployment, according to the survey.
The distribution of two vaccines in the U.S., stronger fiscal help following Democrats taking control of the Congress, and continued monetary support have led some investors to raise their economic forecasts for this year. The 10-year U.S. Treasury yield has risen this month to its highest level since last March.
“The release of pent-up demand, powered by monetary and fiscal policy, pushes the risks for both growth and inflation on the upside in the second half of 2021 and 2022,” economist Lynn Reaser of Point Loma Nazarene University said in a survey response.
What Bloomberg’s Economists Say...
“Bloomberg Economics cautions not to view the upcoming moves as policy makers drifting toward an exit strategy any time soon. The Fed will proceed with extreme caution to ensure that the taper tantrum of 2013 is not repeated.”
-- Carl Riccadonna and Yelena Shulyatyeva, economists
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Many of the economists surveyed said they have altered forecasts in light of the fiscal stimulus, with virtually all of them raising their outlook for economic growth, which includes government spending. More than half said the extra funding would influence their unemployment forecasts and almost 50% said it would cause a shift in their 2021 year-end inflation estimates.
Chair Jerome Powell as well as other Fed policy makers have suggested they don’t see any reason to change their bond buying or interest rates anytime soon. “Now is not the time to be talking about exit,” Powell said in a virtual speech Jan. 14.
The FOMC last month pledged to continue to make $120 billion in monthly asset purchases until there’s “substantial further progress” toward employment and inflation goals. The economists in the Bloomberg survey don’t expect that to be met for some time.
Just 10% of those surveyed expect a tapering of purchases in the next two quarters, while 35% are looking for a start in the first three months of 2022, and another 28% after that.
The Fed’s goal has been to avoid unnecessary volatility such as the 2013 taper tantrum, when former Chairman Ben Bernanke’s hint of an early reduction in purchases led to a surge in Treasury yields. The eventual 2014 taper went off smoothly.
Economists expect the Fed to draw out the taper before stopping purchases altogether to keep markets calm. About 48% say the slowdown will last seven to 12 months, while 20% are looking for 13 months to 18 months, and 18% say it will be 19 to 24 months.
The Fed has signaled rate increases won’t happen until the bond program is wound down. The Fed cut rates near zero last March and its December forecasts suggested they would remain at that level through 2023.
Even so, nearly half of the economists are looking for a 2023 liftoff, while 40% see the first rate hike happening in 2024 or later.
“Members of the FOMC have emphasized that interest-rate policy will not change anytime soon,” said Hugh Johnson, chairman of Hugh Johnson Advisors LLC, who expects the target rate will remain unchanged through 2022.
With super-easy monetary policy forecast, Powell might well get reappointed as chair by Biden when his term expires in 2022, according to economists. A second term is seen as likely to be offered, almost three-quarters of the respondents said, while the rest expect the new president to look elsewhere for a central bank leader.
Powell and other policy makers’ goals of reaching 2% inflation, and overshooting for a time, have been bolstered by unprecedented fiscal and monetary policy support. Most of the economists see the goal of reaching 2% by 2023 as credible. Asked to rate that from 1 to 10, with the higher number representing most credible, the median answer was 7.
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