The Federal Reserve, Jerome Powell, testified during a Senate Banking Committee hearing on the “Quarterly Report of the CARES Act to Congress” at the Capitol in Washington, USA, on December 1, 2020.
Susan Walsh | Reuters
Federal Reserve Chairman Jerome Powell will try to avoid appearing hawkish in any way when he talks Wednesday afternoon about the Fed’s commitment to its easing policies, particularly its bond-buying program.
The Fed is not expected to take any action at its January meeting, and is likely to reaffirm its commitment to low interest rates and other easing policies when it issues its statement at 2 pm Eastern time.
When Powell speaks at 2:30 pm ET, he must also acknowledge that the economy has slowed, consumer spending has weakened and the job market has deteriorated since the December meeting.
“He will say that rates remain low,” said John Briggs, head of global strategy at NatWest Markets. “We need more tax [stimulus]. We are not yet out of the woods with the virus, and rates will remain low for a considerable period. There is still much progress to be made. ”
The market is focused on what Powell will say about Fed bond purchases, the subject of much speculation and something that the Federal Open Market Committee is likely to discuss behind closed doors.
The stock was being hit on Wednesday, with the Dow falling 1%.
The Fed buys $ 80 billion in Treasury bonds and $ 40 billion in mortgage bonds each month. It is expected to reduce these purchases when it considers that the economy is strong enough.
The CNBC Fed survey found that 60% of the 32 Fed observers surveyed expect policymakers to start reducing these purchases in the next 12 months, with most starting in November. But bond strategists say the market may be surprised by this at the moment.
“I think I would focus more on the reduction conversation. If Powell puts it emphatically, it is one thing.
If it’s tasteless, that’s another one, ”said Michael Schumacher, director of rates at Wells Fargo. Rates, which move in contrast to bond prices, have recently risen as some Fed officials, including the Atlanta Fed chairman , Raphael Bostic, mentioned the Fed’s potential to reduce its purchases.
But Powell and Vice President Richard Clarida acted to crush speculation. Clarida said she expects to see the same pace of purchases by the end of the year, and Powell said the Fed will start communicating about the program well before it starts to decline. Yields have also risen with the prospect of more government spending, but have fallen this week on the view that the next fiscal stimulus package may be less than proposed.
Rick Rieder, BlackRock’s global fixed income CIO, said he sees the economy recovering more than expected, even with weaker payroll data. He said signs of improvement are showing up in things like Philly Fed research and strength in manufacturing, housing and construction.
“I think that in the second and third quarters the growth will be significantly higher and people will start to interpret this because the Fed is not going to stay put forever,” he said. “I think in June, the Fed will start discussing the reduction, and I’m not sure if they will actually start reducing this year. … I think there is a possibility.”
Rieder said the Fed will have to take it slow to introduce the reduction into the market. It will also have to see how it is received and have the flexibility to reverse the course if there is a strong reaction from the market that causes interest rates to rise suddenly.
On Wednesday, he expects Powell to support President Joe Biden’s $ 1.9 trillion stimulus program.
“They will certainly not provide figures, but I think they will point out several things. One 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 fiscal and I think they will do what they can to keep the policy well supported by monetary policy. “
The Fed must also reiterate that the course of the economy will be determined by the coronavirus.
Bank of America strategists say little is expected of this week’s Fed meeting, but they see a risk that the Fed will move markets. They don’t expect the Fed to reduce its bond purchases until the second half of next year, but it can act earlier if there is a fiscal stimulus package earlier this year to help the economy.
“The markets are expecting little at this meeting, but they probably see the Fed’s communication risks as asymmetrical: it will be difficult for the Fed to appear more dovish, but easy for the Fed to sound more hawkish. As such, markets may misinterpret the discussions of the President Powell around the positive risk of being hawkish, “said the strategists in a note.