TheFederalReserveannouncestheInterestRateDecisionandreleasestheMonetaryPolicyStatementat18:00GMTandaswegetclosertothereleasetime,herearetheexpectationsasforecastbyanalystsandresearchersof13majorbanks.TheFediswidelyexpectedtoannounceareductionof$15billioninmonthlyassetpurchaseswhilekeepingthepolicyrateunchanged.
“ANovember3rdtaperannouncementlookslikeaforgoneconclusion.ItseemssettostartinNovemberwithassetpurchasesreducedbyUSD15Beachmonth,splitUSD10BTreasuriesandUSD5BAgencyMBS.TheplanisforitspurchasestobereducedtozerobyJune,butwiththeeconomygrowing,creatingjobsandlikelyexperiencingelevatedinflationthroughtoatleastthemiddleofnextyearwethinkitcouldbeconcludedmoreswiftly.Wedon’tthinkinterestrateincreaseswillbefarbehind.Wehavebeenforecastingtwointerestrateincreasesinthesecondhalfof2022forquitesometime–onceinSeptemberandonceinDecember.However,giventheevidentintensificationofinflationpressurestherisksareincreasinglyskewedtowardstheFederalReservetakingamoreaggressivepositionandhikingthreetimes,startinginJuly.”
“Priortothepre-meetingmediablackout,numerousmembersoftheFOMCexpressedsupportforaformaltaperdecisionattheNovembermeeting.Theyalsogavesimilarguidanceonitslength,withmid-2022seenastheoptimalenddate.BeginninginDecember,thisprocesswillseebondandRMBSpurchasesbytheFederalReservereducedbyacombinedUSD15Bpermonth.Withthisdecisionessentiallyadonedealforthemarket,participantswillbefocusedonanydiscussionaroundthenextstepsforpolicybeyondthetaper.WeexpectChairPowellandtheFOMCwillrecognisetheriskswithrespecttoinflation,butliketheBoCbeinnohurrytosignalrateincreases,withDecember2022stillthemostlikelystartingpoint.”
“WeexpecttheFedwillannounceQEtaperingatnextweek’smeeting.WeexpecttheFedtostarttaperingimmediatelyinNovemberwithataperingpaceofUSD15Bpermonth(completedinJune).RiskistiltedtowardsahighertaperingpaceofUSD20Bpermonth.FedChairJeromePowellsoundedmoreconcernedabouthighinflationonFriday,whichweexpecthimtorepeatonWednesday.WeexpectPowelltorepeatthatthetaperingdecisionisnotrelatedtoafuturedecisiononratehikes.Still,weexpecttherhetorictobemorehawkishthaninSeptember.”
“Fedofficialswillalmostcertainlyannouncethestartoftapering.Asfor‘liftoff,’wedon'texpectanydefinitivenewsignals,andweexpect‘elevated’inflationwillcontinuetobecharacterizedas‘largelyreflectingtransitoryfactors,’butthechairmanwilllikelyemphasizehowtaperingwillgiveofficialsflexibilityinrespondingiftheeconomyevolvesinawaythatdeviatessignificantlyfromcurrentexpectations.”
“TheFOMCmeetingisexpectedtoconcludewithaformalannouncementofthestartoftapering.Therewillbenoupdateoftheeconomicandrateprojections).Duringthepressconference,Powellislikelytostressagainthattheendoftaperingdoesnotautomaticallymeanthestartofhiking.Andthatthehighinflationreadingsaretransitory.We’llputUSD5intheAtlantaFed’sswearjar.”
“TheFOMCnextweekisexpectedtoannounceitwilltaperitsbond-buyingprogramtoUSD10BinTreasuriesandUSD5Binmortgagebackedsecurities,andcommittowinddownnetpurchasesaroundmid-year2022.”
“WelookfortheFedtoannounceareductioninthepaceofcurrentholdingsofUSD15Bpermonth.Atpresent,theFedpurchasesUSD120Bpermonth,consistingofUSD80BofTreasurysecuritiesandUSD40Bofmortgage-backedsecurities.ItisexpectedtoreduceTreasurypurchasesbyUSD10Bpermonthandmortgage-backedsecuritiesbyUSD5Bpermonth.ByreducinginincrementsofUSD15Bpermonth,theFedshouldenditsassetpurchasesbythemiddleof2022.”
“BasedonrecentFedcommunications,ataperofthecentralbank’sassetpurchasepaceisallbutassuredtobeunveiled.ThepaceofreductionislikelytobesetatUSD15B/month(allocatedproportionallybetweenTreasuriesandMBS),whichwouldimplycompletionofthetaperingprocessmidwaythroughnextyear.Thestatementwillsurelyacknowledgeelevatedinflationandwe’llbekeentoseeiftheFedoptstodropits‘transitory’assessmentofinflationarypressures.Therewillbenoaccompanyingsummaryofeconomicprojectionspresented–thatwillcomeinDecember–butthebalanceofrisksisveryclearlyskewedtoamorehawkishdotplotgivenongoinginflationarypressures.However,Powellmayremainnon-committalinthepressconferenceonthetimingoffutureinterestrateadjustmentsandreiteratethattaperingassetpurchasesisnotasignalthatinterestratehikesareimminent.”
“Powellmightnothavethevotestobeanall-outhawk,orthenervetodeliveraverysternmessageonratesbeforehisreappointmentisalock.Butgivingthegreenlighttostarttaperingnow,anddoingsoonatighttimetable,wouldbeaclearsignalthattheFedwantstogetthatoutofthewayintimeforacoupleofratehikesinthelatterhalfofnextyear.”
“TheFedisreadytopullthetaperingtriggerthisWednesdayandweseerisksclearlytiltedtowardsaswifterprocessthananticipatedbytheconsensus.Powellwillhencehavetobeveryconcreterhetoricallytoavoidacopy/pasteofwhatRBA,BoCandBoEhavetriggeredintheveryfront-endoftherespectiveyieldcurves.UnlessPowellandtheFOMCexplicitlystatethatnothingcanhappenonthepolicyrateuntilacertaindate,weexpectmarketstochaseratehikesevenfurtherafterthepolicydecisiontostarttapering.”
“Fedwillseektopushbackonratehikeexpectations–buthowaggressively?ThekeyquestiongoingintothismeetingwillbetowhatextenttheFedpushesbackagainstmarketpricing,whichnowsuggeststheFedwillbeginraisingratesbythemiddleof2022.WecontinuetothinkthereisahighbarfortheFedtorowbackonitssignallingthattheendofassetpurchaseswouldnotbeimmediatelyfollowedbyratehikes.Assuch,ChairPowellwilllikelypushbackagainsttherecentshiftinmarketexpectations.However,itmightbedifficulttodothiswithcredibilityatthisstage,withmarketslikelyawaitingaconvincingturnaroundininflationdynamicsbeforeratehikeexpectationsunwind.Thisisnotlikelyinthenearterm–ifanything,weexpectareaccelerationinmonthlyinflationintheUSoverthecomingmonths,withpricegrowthcoolingagaininthefirsthalfof2022.Consistentwiththis,wecontinuetoexpecttheFedtolookthroughthecurrentelevatedinflation,andtobeginhikinginearly2023.”
“WedonotexpectChairPowelltostronglypushbackagainstthemarketpricingofearlierFedratehikes.TaperingUSD120Binassetpurchasesiswidelyexpectedtobeannounced.Weexpectamid-NovemberstartofaUSD15B/monthreduction.Thatpace,however,maylikelybeleftrelativelyflexible,givingFedofficialstheoptiontobringforwardtheendoftaperingandthepotentialfirst-ratehike.Citi’sbasecaseremainsthefirstFedratehikesinDec-22,butinflationconcerncouldleadtoscenarioswithfastertaperingofassetpurchasesandearlierhikes.”
“OurviewisthattheFedwillannouncemonthlyreductionsofUSD10BandUSD5BinthepaceofTreasuryandMBSpurchasesrespectively,withthefirstcuttopurchasescominginmid-November.WeseethisbringingthelatestroundofQEtoanendinJune2022,thoughthiswouldalsooffersomeflexibilitytorespondtoanychangesintheeconomicenvironmentoverthecomingeightmonthsshouldtheyarise.Onthequestionofratehikes,wethinklift-offwon’ttakeplaceuntilDecember2022,butdon’tseeChairPowellactivelypushingbackoncurrentmarketpricing(afullhikenearlypricedinbymid-year22)giventheelevateduncertaintyabouttheoutlook,particularlyoninflation.”
See–FedPreview:Fivedollar-movingthingstowatchoutforonthehistorictaperingannouncement
