Cuts to take place this year rather than 2022 that was earlier predicted

As the American economy recovers strongly from COVD-19, the Federal Reserve is expected to begin trimming its US$120 billion in monthly asset purchases before the end of the year, rather than next year as earlier predicted.

This is much earlier than the forecast in the March survey, which indicated that the cuts by the Fed Reserve, America’s Central Bank, could take place as early as next year. According to economists surveyed by Bloomberg, this leaves the Feds asset purchases untouched for several more months, with the first interest-rate increase still not expected until 2023.

In contrast, the Bank of Canada said last week it would scale back its purchases of government debt and accelerate the timetable for a possible rate increase, though the European Central Bank meeting on April 22 left its crisis-fighting tools unchanged. In the Bloomberg survey, about 45 per cent of the economists expect the Federal Open Market Committee (FOMC) to announce tapering in the fourth quarter with 14 per cent seeing this happening in the third quarter.

The survey of 49 economists was conducted April 16-21. The result is a hawkish shift from March when slightly more economists viewed tapering as a 2022 event.

FOMC to announce on Wednesday its bond purchases agenda

The FOMC is to conclude its two-day meeting on Wednesday and at that time is expected to reaffirm plans to only adjust purchases once the U.S. economy achieves substantial further progress toward its employment and inflation goals. It is not expected that the Feds will raise the target of its benchmark rate from a zero to 0.25 per cent range.

The FOMC policy statement will be released at 2 p.m. on Wednesday with Fed Chair Jerome Powell holding a virtual press conference 30 minutes later. Powell had said he will alert markets well in advance of any change, which will come when the committee views its goals in sight noting that a policy change will hinge on actual incoming economic reports, not just bullish forecasts.

Carl Riccadonna, chief US economist, opined that, “our view is that the tapering happens in the first quarter of next year. This will give plenty of opportunity to pre-announce/forewarn/hint/etc. starting from the July semi-annual testimony, through Jackson Hole and over the course of the second half”.

More than two-thirds of the economists surveyed expect the FOMC will give an early-warning signal of tapering this year, with the largest number of 45 per cent looking for a nod during the July-September quarter. That could come from either the July or September FOMC meetings or Powell’s semi-annual testimony to Congress.

Another option is the Kansas City Fed’s annual late-August Jackson Hole Economic Symposium, which has been used as a venue to deliver signals in the past. The Fed chair typically gives the keynote speech and Powell has so far continued that tradition.

Recent data showing robust economic rebound this year

Recent economic data have supported the Fed’s view of a robust rebound this year, with unemployment dropping and inflation expected to exceed two per cent in 2021. While the FOMC has been intentionally vague on how it will define substantial further progress, economists in the survey expect tapering to start when the unemployment rate is around 4.5 per cent with inflation at 2.1 per cent, measured by the personal consumption expenditures price index.

Most economists expect the tapering of US$80 billion in Treasuries and US$40 billion in mortgage-backed securities purchases to last seven to 12 months. Beyond the taper, the central bank is likely to be patient in actually raising rates from near zero.

Interest rates aren’t likely to be raised until 2023, the economists say, which is nonetheless faster than the FOMC projected in March. Rates are likely to rise by 50 basis points to 0.75 per cent by the end of 2023 and to 1.25 per cent by the end of 2024 was the median response in the survey.

Powell’s current term as Fed chair expires in February. However, about three quarters of the economists surveyed expect US President Joe Biden to keep him in the job, an overwhelming number that’s broadly unchanged from the March survey. Powell has deflected all questions on whether he’d serve four more years if asked, leaving the impression intact that he’d like to stay at the helm.

The strong economic momentum is lifting the outlook among economists, with nearly two thirds saying risks are to the upside. Some 26 per cent view them as roughly balanced and nine per cent emphasise downside concerns. An accelerated U.S. vaccination programme, fiscal stimulus and Biden’s US$2.25-trillion infrastructure and jobs plan all create the risk of overheating, in the view of economists.