Federal Reserve officials are likely to express concerns about the rapidly spreading delta variant of the coronavirus. The market has been waiting to hear from the Fed on its plans to pare back its bond buying, the first major step in easing policy.
“This was supposed to be the meeting where they were really focusing on tapering,” said Mark Cabana, head of short U.S. rate strategy at Bank of America. “We think the market is going to end up hearing Powell sound neutral to dovish, at least from a rates market perspective, primarily because he’s going to keep talking about downside risks from Covid.”
The Fed releases a statement Wednesday at 2 p.m. ET, following its two-day meeting. Chairman Jerome Powell speaks to the media at 2:30 p.m.
Fed watchers expect officials to discuss tapering their minimum $120 billion monthly purchases of Treasury and mortgage-backed securities. They also expect it to move toward starting the unwinding by late this year or early next year.
“He’s going to have to admit that the delta variant makes uncertainty about the outlook much higher. He has to be very careful about the words he uses,” said Diane Swonk, chief economist at Grant Thornton. Economists said the delta variant is not yet showing up in economic data, but it could.
“The problem is it’s now harder to work through these supply-chain problems,” she said. “It may dampen demand as well. ... I wouldn’t be surprised to see people cancelling going inside to restaurants.”
The timing of tapering
The Fed has widely been expected to start seriously discussing the rollback of its bond purchases in late August at its Jackson Hole symposium or at its September meeting. The slowing of purchases were expected by some to begin before year-end.
But Cabana has been looking for the Fed to start tapering early next year, cutting back evenly on mortgage and Treasury purchases over a 10-month period.
“I think the resurgence of Covid pushes back on the notion that they’re going to start tapering in Q4,” he said. “I think we can all agree if we’re living with Covid longer than we thought, inflation becomes much less of a concern potentially because demand is going to wane. In that context, we think there’s really one thing ... that matters in the world, and that’s the path of this virus.”
Cabana said he expects the Fed to signal at its September meeting that it will slow the bond purchases. He also looks for Powell to say the purchases do not have to be mechanical, and the Fed could slow or speed them if it wants.
The Fed is widely expected to take as long as a year to end the purchases, and at that point, it could be open to raising interest rates. In its forecast, it has two interest rate hikes in 2023.
Reference: CNBC
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