Federal Reserve Jerome Powell testifies at a Senate Banking Committee hearing on “The Quarterly CARES Act Report to Congress” held on Capitol Hill in Washington, USA, December 1, 2020.
Susan Walsh | Reuters
Federal Reserve Chairman Jerome Powell will try not to sound aggressive in any way when he speaks Wednesday afternoon about the Fed’s commitment to its easing policy, particularly its bond buying program.
The Fed is not expected to take any action at its January meeting and will likely reaffirm its commitment to low interest rates and other easing policies when it releases 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 softened, consumer spending has weakened, and the labor market has deteriorated since the December meeting.
“He’s going to say rates will remain low,” said John Briggs, NatWest Markets’ chief global strategy. “We need more fiscal money [stimulus]. We are not out of the woods with the virus and rates will remain low for a significant period of time. There is still much progress to be made. ”
The market is in tune with what Powell will say about the Fed’s bond purchases, the subject of much speculation and something the Federal Open Market Committee would likely discuss behind closed doors.
Stocks were hit on Wednesday as the Dow fell 1%.
The Fed buys $ 80 billion in Treasury bills and $ 40 billion in mortgage bonds every month. These purchases are expected to be phased out when it considers the economy to be strong enough.
CNBC’s Fed survey found that 60% of the 32 Fed viewers surveyed expect policymakers to start scaling back those purchases in the next 12 months, most of them starting in November. But bond strategists say that this may take the market by surprise at this point.
I think I would focus more on the ending conversation. If Powell puts that down emphatically, that’s one thing.
If he’s a bit weak, that’s another, ” said Michael Schumacher, Wells Fargo’s director of interest rates. purchases.
But Powell and Vice Chairman Richard Clarida wanted to quell speculation. Clarida said he expects to see the same buying rhythm by the end of the year, and Powell said the Fed will begin communicating about the program well before it begins to wind down. Yields were also boosted by the prospect of more government spending, but have fallen this week on the assumption that the next fiscal stimulus package could be smaller than suggested.
Rick Rieder, BlackRock CIO global fixed income, said he sees the economy picking up more than generally expected, even with softer wage data. He said there are glimpses of improvement in things like the Philly Fed survey and strength in manufacturing, housing and construction.
“I think growth in the second and third quarters will be significantly higher, and people are going to interpret that as the Fed will not be on hold forever,” he said. “I think the Fed will begin the discussion on tapering in June, and I’m not sure if they actually start tapering this year. … I think there is a possibility.”
Rieder said the Fed will have to move slowly to introduce tapering to the market. It will also need to see how it is received and have the flexibility to change course if there is a strong market reaction that suddenly drives interest rates higher.
As for Wednesday, he expects Powell to support President Joe Biden’s $ 1.9 trillion stimulus program.
“They certainly won’t give numbers, but I think they’ll point out a few things. One of them is that the system can handle more fiscal policy and the Fed is willing and able to support it. [through bond buying and interest rates]”, he said.” The Fed is now the co-pilot of the tax authorities, and I think they will do what they can to keep policy well supported by monetary policy. “
The Fed is also expected to reiterate that the course of the economy is determined by the corona virus.
Bank of America strategists say little is expected from this week’s Fed meeting, but they see the risk of the Fed moving markets. They don’t expect the Fed to wind down its bond purchases until the second half of next year, but it could move sooner if a fiscal stimulus package comes in early this year to help the economy.
“Markets expect little at this meeting, but are likely to view the Fed’s communication risks as asymmetrical: it will be difficult for the Fed to sound more moderate, but it will be easy for the Fed to sound more aggressive. are, ”the strategists said in a note.