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Fed Seen Speeding Taper of MBS in Early-2022 Start to Pullback

 

The Federal Reserve will start scaling back asset purchases next year with an emphasis on mortgage-backed securities, according to economists surveyed by Bloomberg, who see the central bank raising interest rates at a quicker pace through 2024 than previously thought.

 

Slightly more than half expect MBS tapering will happen proportionally faster than for Treasuries. Several regional Fed presidents are advocating for that approach to cool the housing market, though Chair Jerome Powell and New York Fed chief John Williams have sounded lukewarm to the suggestion.

 

The economists also see two quarter-point rate hikes by the end of 2023 -- matching the median projection of Fed officials published in June -- with three more increases in 2024. That’s more than than predicted in the June survey. A large majority of them continue to expect President Joe Biden will renominate Powell as chair.

 

The poll of 51 economists was conducted July 16-21.

 

The Federal Open Market Committee concludes its two-day policy meeting on Wednesday and is expected to hold rates near zero and continue monthly purchase of $80 billion in Treasuries and $40 billion in mortgage securities. Officials have pledged to maintain bond buying until the economy shows “substantial further progress” on inflation and employment as it recovers from Covid-19.

 

There are no published FOMC forecasts this meeting. While the committee will discuss its tapering plans, Powell has indicated he believes it’s too early to slow stimulus.

 

Three-quarters of economists expect either an early signal at the Kansas City Fed’s Aug. 26-28 policy retreat in Jackson Hole, Wyoming, where Powell is likely to speak, or at the Sept. 21-22 FOMC meeting, when the committee updates its quarterly forecasts.

 

 

That is likely to be followed by a formal announcement of tapering in December, in the view of nearly half of those surveyed, and actual reductions starting in the first quarter of 2022, according to 71% of the economists.

 

 

In the survey, 8% said the Fed will start with an MBS only tapering, while 46% said the reductions will be in equal amounts, effectively ending mortgage purchases long before Treasuries. That’s an approach suggested by Boston Fed President Eric Rosengren. Another 46% say the reductions should be proportional to the buying.

 

Reference: Finance.yahoo