Fed will need to reassure the market it’s not thinking about dialing back its support
Federal Reserve Chairman Jerome Powell has a few nerves to quell among market participants wondering when the central bank will start tapping the brakes on all the help it’s been providing.
The big buzzword surrounding the Fed now is “tapering.” It’s a reference to pulling back on the monthly bond purchases that have helped keep the financial system flush with cash and have encouraged investors to continue to take on risk despite stock market valuations that are their highest since at least the dot-com bubble of the early 21st century.
Markets figure that as long as the Fed keeps pumping, then it’s safe to keep buying.
What could change
“While a fiscal boost means the economy should run faster, it still needs to cover a lot of distance towards its goals before any adjustments take place, and the Fed will adopt a posture of strategic patience to allow these improvements – particularly in inflation expectations – to unfold,” wrote Krishna Guha, head of global policy and central bank strategy at Evercore ISI.
The chairman also has been clear about wanting to give the markets plenty of notice about when tapering will begin, which Guha thinks won’t happen until 2022 and then take a year before the Fed stops growing its $7.5 trillion balance sheet.
Consequently, the post-meeting statement likely will see little change, while Powell, at his news conference afterward, will keep the message simple.
“We expect no substantive changes in the post-meeting statement,” wrote Citigroup economist Andrew Hollenhorst. “Later this year, the statement may be substantially revised to reflect an improving public health outlook, which would involve changing or removing the sections of text related to downside risk related to COVID-19.”
That means more zero interest rates and more bond buying, despite what future indicators are saying now.
“The market has been on a veritable treasure hunt to find anything that suggests the Fed is thinking of actually moving,” said Quincy Krosby, chief market strategist at Prudential Financial. “Why would he deviate now from what he’s been saying?”
Reference: CNBC
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