Federal Reserve Jerome Powell testifies during a hearing of the Senate Banking Committee on the Quarterly CARES Act Report to Congress on Capitol Hill in Washington, United States, on December 1, 2020.
Susan Walsh | Reuters
Federal Reserve Chairman Jerome Powell will try to avoid sounding hawkish in any way when he talks Wednesday afternoon about the Fed’s commitment to its easing policy, particularly its bond-buying program.
The Fed is not expected to take action at its January meeting, and it is likely to reaffirm its commitment to low interest rates and other easing measures when it makes its statement at 2 p.m. ET.
When Powell speaks at 2:30 p.m. ET, he is also expected to acknowledge that the economy has weakened, consumer spending has weakened, and the labor market has deteriorated since the December meeting.
“He will say rates will stay low,” said John Briggs, director of global strategy for NatWest Markets. “We need more taxes [stimulus]. We are not out of the woods with the virus and rates will remain low for a considerable period of time. Its a lot to do. ”
The market is focused on what Powell will say about the Fed’s bond purchases, which has been the subject of much speculation, and what the Federal Open Market Committee is likely to discuss behind closed doors.
Stocks were hit with the Dow down 1% on Wednesday.
The Fed buys $ 80 billion in government bonds and $ 40 billion in mortgage paper every month. These purchases are expected to be scaled back when the economy is strong enough.
CNBC’s Fed poll found that 60% of the 32 Fed watchers polled believe policymakers will cut back on these purchases over the next 12 months, with most of them starting from November. But bond strategists say the market may be negatively surprised by this at this point.
“I think I would focus more on the taper conversation. If Powell insists on putting that down, that’s one thing.
But Powell and Vice-Chairman Richard Clarida tried to quell the speculation. Clarida said he anticipates the buying pace will be the same by the end of the year, and Powell said the Fed will start communicating about the program long before it tapers off. Yields were also lifted by the prospect of more government spending, but have fallen this week as the next stimulus package may be smaller than proposed.
Rick Rieder, Global Fixed Income at BlackRock CIO, said he saw the economy recovering more than widely expected despite the weaker salary data. He said things like the Philly Fed survey and strength in manufacturing, housing and construction are improving.
“I think growth will be significantly higher in the second and third quarters, and people will start to interpret this as the Fed isn’t going to be on hold forever,” he said. “I think the Fed will start their discussion on tapering in June, and I’m not sure they will actually start tapering this year … I think there is a possibility.”
Rieder said the Fed would have to go slowly to rejuvenate the market. It also needs to see how it is received and have the flexibility to reverse course if there is a strong market reaction that suddenly drives interest rates high.
On Wednesday, he expects Powell to support President Joe Biden’s $ 1.9 trillion stimulus package.
“They certainly won’t give numbers, but I think they’ll point out a number of things. For one, the system can do more fiscal policy and the Fed is ready and able to support that.” [through bond buying and interest rates]”, he said.” The Fed is now the financial sector co-pilot and I think they will do whatever it takes to give good monetary support to the policy. “
The Fed is also expected to reiterate that the course of the economy will be determined by the coronavirus.
Bank of America strategists say little is expected from this week’s Fed meeting, but they see the risk that the Fed will move markets. They don’t expect the Fed to curb its bond purchases until the second half of next year, but it could act sooner if there is a fiscal stimulus package to help the economy earlier this year.
“Markets expect little at this meeting, but likely view the Fed’s communications risks as asymmetrical: It will be difficult for the Fed to sound more cautious, but easy for the Fed to sound more hawkish. Hence, the markets can see Chair’s discussions Misinterpreting Powell about the uptrend risk being hawkish, “the strategists said in a note.