Fed to Taper in November Amid Inflation Concerns, Economists Say

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Federal Reserve policy makers are expected to announce this week that they will start scaling back their massive asset-purchase program amid greater concern over inflation, economists surveyed by Bloomberg said.

A majority of the 49 economists in the survey predicted the U.S. central bank will begin the taper in November and wrap it up by mid-2022, curbing the current $120 billion monthly buying pace by reducing Treasuries by $10 billion a month and mortgage-backed securities by $5 billion. They are closely divided on whether interest-rate liftoff will be in 2022 or early 2023, with a slim majority estimating the latter timing while they see rates rising to 1.75% by the end of 2024, a quarter point more than the survey projected in September.

The Federal Open Market Committee meets for two days starting Tuesday and will issue a policy statement at 2 p.m. in Washington Wednesday. There will be no quarterly economic and rate forecasts published at this meeting. Chair Jerome Powell will hold a press conference 30 minutes later.

Tapering

“A Nov. 3 taper announcement looks a forgone conclusion,” James Knightley, chief international economist at ING Financial Markets LLC, said in a survey response. With inflation persisting, “the taper could end more abruptly than currently signaled with a high probability of at least two interest-rate increases in the second half of next year.”

Almost all the economists expect the FOMC to announce tapering this meeting, which is in line with Powell’s comment on Oct. 22 that “I do think it’s time to taper.” Nearly two-thirds expect the slowing in bond buying to begin this month, with most of the rest looking for a December kickoff. The committee discussed options for both months in its prior meeting in September, according to minutes of that debate.

The committee’s most contentious decision at the upcoming meeting may be how long the tapering should last. 

While most economists expect bond purchases will be reduced by $15 billion every month -- in a process that would wrap up around the end of June -- a separate question in the survey revealed a number who think the Fed may decide to speed up. That showed 35% expecting the taper to be completed in seven months or faster, versus 51% who expect it will take eight months.

A quicker end to the tapering would give the policy makers the flexibility to raise interest rates earlier than otherwise, because Powell and others have said they want to end the taper before moving to possible hikes.

What Bloomberg Economics Says...

“We think there will be some language about how the taper pace is not on a “preset” course. This would be similar to the 2013 taper announcement, but more importantly, preserve some flexibility for the Fed if inflation does turns out to be stickier and full employment looks to be reached earlier.”

-- Anna Wong (economist)

--Click here to read the note 

Much of the meeting will be focused on a review of surging inflation, which Powell has acknowledged has lasted longer than expected. The FOMC may tweak its statement language to repeat that while inflation will be transitory due to supply disruptions, it is persisting longer or there may be some other-than-transitory factors, according to 54% of the economists.

“The Fed is likely to continue to call high year-over-year inflation rates as transitory although allow that they may not decline in 2022 to the extent previously forecast,” said Hugh Johnson, chief economist at Graypoint LLC.

Even so, the committee is almost certain to retain its language that it won’t raise interest rates until the labor market meets its full employment goal. While the FOMC uses a variety of gauges in measuring that objective, economists say it likely suggests liftoff when the unemployment rate falls to 4%. 

Though the FOMC has emphasized it wants an inclusive definition of maximum employment, the first hike would occur with Black unemployment at 6%, in the view of a smaller number of economists who forecast that metric.

Inflation Risks

Most of the economists see upside risks to inflation, a view that echoes that of Powell and other central bankers who have spoken recently. They see the risks to economic growth as more uncertain, with 41% putting them as roughly balanced and 45% seeing risks to the downside.

“The risks of too high inflation for too long and the possibility of an emerging conflict between the Fed’s dual goals will be in focus for the meeting and may be acknowledged in the statement,” said Elisabet Kopelman, U.S. economist for Skandinaviska Enskilda Banken AB. 

While FOMC officials have generally expressed confidence that Americans’ expectations for inflation over the medium and long term are well anchored, reflecting a view that price gains will come down from recent elevated levels, the economists are less sure. In the survey, 52% described inflation expectations as consistent with the Fed’s goals, while 44% saw them as out of line.

Powell Future

The meeting takes place amid intense focus on whether Powell will be renominated, with his term as chair ending in February.

As President Joe Biden considers openings for the top Fed job and other slots, 79% of the economists expect Biden to keep him in the job -- still an overwhelming number but one that’s dropped slightly since September. Fed Governor Lael Brainard, a Democrat, is seen as the most likely alternative, with 13% of economists predicting she will be chosen as chair.

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