According to economists polled by Bloomberg, the US Federal Reserve will begin rolling back asset purchases next year, with an emphasis on mortgage-backed securities. These assume that the central bank will raise interest rates faster than previously assumed by 2024.
A little more than half assume that the tapering of MBS will occur proportionally faster than with Treasuries. Several regional Fed presidents are advocating this approach to cool the housing market, although Chairman Jerome Powell and New York Fed chief John Williams sounded lukewarm to the proposal.
The survey of 51 economists was conducted from July 16-21.
The Federal Reserve's Open Markets Committee ends its two-day monetary policy meeting on Wednesday and is expected to keep rates near zero and continue to buy $ 80 billion in US Treasuries and $ 40 billion in mortgage securities on a monthly basis. Officials have pledged to hold bond purchases until the economy shows "significant further progress" in inflation and employment as it recovers from COVID-19.
There are no published FOMC forecasts for this session. While the committee will discuss its tapering plans, Powell has hinted that he thinks it's too early to put a brake on stimulation.
"The Fed is far from discussing when to raise rates," said Scott Brown, chief economist at Raymond James Financial, in a poll. "Tapering could be hinted at in Jackson Hole or at the FOMC meeting in September" with a "formal announcement by November, beginning in early 2022". That is more than forecast in the June survey. A large majority of them continue to expect President Joe Biden to reappoint Powell as chairman.
"The minutes of the June meeting indicated that there was shared support, with 'several' favoring MBS first and 'several' saying it was not worth it," said Bloomberg economist Andrew Husby. "This mixed support and easier communication suggests that they will be concurrent and on steady glide paths. The Fed believes that these purchases are not specifically intended to support the housing market, so a faster cut would be implicit. " they go back that view. "
Much of the FOMC discussion will focus on when and how to reduce its asset purchases, and there is a consensus emerging among economists on how the plan will play out.
Three-quarters of economists expect an early signal either at the Kansas City Fed policy withdrawal August 26-28 in Jackson Hole, Wyoming, where Powell is likely to speak, or at the FOMC September 21-22, when the committee updates its quarterly forecasts.
According to 71% of economists, this is likely to be followed by a formal announcement of the reduction in December and an actual reduction from the first quarter of 2022, according to almost half of those surveyed.
More than half of economists expect a term of 10 to 12 months, which, if it starts at the beginning of the first quarter, would be completed by the end of 2022.
Some Fed officials say they want to end the rate cut before raising rates, and their median forecast shows they will be on hold until next year, despite seven out of 18 officials advocating a rate hike in 2022.
Hugh Johnson, chairman and founder of Hugh Johnson Advisors, said he expected Fed policy to "remain benign" through the second half of 2022, with a "shift toward caution likely" in the first quarter of the following year.
The increased interest rate projections come amid a spike in inflation, with the reopening leading to sharp price hikes for used cars, hotels, and airfares, among other things. Consumer prices as measured by the consumer price index rose 5.4% year-on-year in June, the fastest increase since 2008.
In its statement this month, the FOMC will maintain that the rise in inflation is mainly a reflection of temporary factors, according to 96% of economists. Respondents largely agree, with 78% of respondents saying the temporary statement is correct.
"Much of the price hike will likely prove temporary, although wage pressures will likely be more persistent due to fiscal policy," said Lindsey Piegza, chief economist at Stifel Nicolaus & Co.
Still, three-quarters of economists say inflation risks are on the upside compared to the FOMC projections, which is their biggest concern when considering economic risks.
Powell's current term as Fed chairman expires in February. Four-fifths of economists expect Biden to keep him on the job, an overwhelming number that has increased slightly since June.
Powell has diverted any questions about whether he would stay in office for four more years if asked, leaving the impression that he would like to stay at the helm. He has broad support for another tenure among the top Biden aides, although the decision is expected later this year and has not yet been presented to the president, according to people familiar with the matter.
Fed Governor Lael Brainard, a Democrat, is seen as the most likely alternative by 16% of the economists surveyed.