According to a recent Bloomberg survey of economists, the Federal Reserve (The Fed) will most likely hint at tapering during its meeting this week and make a formal announcement to scale back asset purchases in November. The survey, composed of 51 economists, also predicted that the U.S. The Central Bank would hold interest rates near zero through 2022, before delivering two quarter-point increases at the end of the following year.
Since last June, The Fed has been purchasing $80 billion of Treasuries and $40 billion of mortgage-backed securities (MBS) to keep long-term interest rates from spiking and bolster demand. These purchases are to maintain their pace until the economy hits what The Fed deems to be “substantial” progress on inflation in the labor market. As stated in Jerome Powell’s speech at the Jackson Hole conference last month, the question of tapering is completely separate from the question of when to raise interest rates.
Two-thirds of economists in Bloomberg’s survey expect bond-tapering to be announced at The Fed’s November 2-3 meeting, with over half expecting tapering to begin in December. This is an earlier forecast than what most economists expected just a few months earlier. Results from the July 22 survey suggest that tapering would begin by 2022, with four-fifths of economists concurring. The most recent survey was taken between September 10 - 15.
The Federal Market Open Committee (FOMC) will meet for two days starting Tuesday and plans to issue a policy statement at 2 p.m. on Wednesday, with updated quarterly economic and rate forecasts. The tapering debate will be the FOMC’s central question for the meeting this week. Although the policy group is expected to hold interest rates near-zero and continue asset purchases at $80 billion Treasuries and $40 billion MBS, some Fed presidents are worried about rising prices and the red-hot housing market.
Some Fed presidents have pushed for tapering to start as soon as September, while others have asked for patience to assess the economic impact of the rising delta variant.
In a response to Bloomberg’s survey, Scott Brown, chief economist with Raymond James Financial, said, “The delta variant and some moderation in inflation should allow the Fed to be patient in tapering, with an announcement likely in November or December, depending on the economic data. The liftoff in short-term interest rates is still a long way off (2nd half of 2023 most likely).”
Nearly three-quarters of the economists surveyed expect The Fed to slow asset purchases of Treasuries and MBS at the same time, rejecting the possibility of officials halting MBS purchases first due to a hot housing market. Generally, there was a consensus among economists on how the tapering will unfold, however, there was uncertainty about how long tapering would last.
Fed presidents led by St. Louis Fed’s James Bullard pushed for tapering to end purchases by the first quarter of 2022. Other presidents are more comfortable with the pace of 2014’s tapering, which lasted 10 months. Overall, 32% are looking for eight-month tapering, though nearly half are looking for 10 months or longer.
At the FOMC meeting this week, quarterly forecasts will be submitted, including the popular “dot-plot” of rate forecasts. Rates are expected to remain the same as the June forecast, with liftoff occurring in 2023.
Still, the policy committee will need to revise its economic projections to reflect higher inflation and the decline in economic growth due to the delta variant. According to the survey, economists believe the FOMC will project 3.8% inflation for 2021 and 2.2% the following two years, with unemployment falling to 3.5% pre-covid low by 2023.
While the Biden administration considers openings for The Fed’s chair and other positions, 89% of economists surveyed believe Biden will keep Powell as the Fed chair. Democrat, Fed Governor Lael Brainard, was considered a better alternative by only 9% of economists.
Click the links provided for further analysis on Bloomberg’s survey.
