Fed Meeting Will Focus on Taper Timetable

Fed Meeting Will Focus on Taper Timetable

Officials are trying to forge consensus on how and when to reduce their asset purchases

Federal Reserve officials will look to forge agreement Wednesday over how and when to begin reducing their large-scale bond-buying efforts, which they launched early in the pandemic to stimulate the U.S. economy.

The central bank in July gave its first signal that officials were more confident the economy was meeting their goals. Since then, senior leaders including Fed Chairman Jerome Powell have indicated they could start to reduce, or taper, those purchases this year.

The Fed will release its postmeeting policy statement at 2 p.m. Eastern time along with new economic and interest-rate projections. Mr. Powell will follow with a press conference at 2:30 p.m., when he could elaborate on how much progress officials have made on their taper plans.

Here’s what to watch:

easing out the taper
Investors will watch how strongly the Fed signals any plans to begin scaling back its bond purchases at its next meeting, on Nov. 2-3. Mr. Powell has promised to provide advance notice of any bond taper, and the Fed could use the policy statement to provide such an alert.

The Fed cut its short-term benchmark rate to near zero when the coronavirus pandemic hit the U.S. economy in March 2020, and it has been purchasing at least $120 billion a month in Treasury and mortgage bonds since June 2020 to provide additional stimulus.

Officials said in December they would continue to buy bonds at that pace until they decide the economy has made “substantial further progress” toward their goals of reversing an employment shortfall—then of around 10 million jobs since the start of the pandemic—and moving inflation back to their 2% goal over time.

Inflation has soared this year, to 4.2% in July using the Fed’s preferred gauge, with most of the gains reflecting disrupted supply chains, temporary shortages and a travel rebound associated with the reopening of the economy.

Mr. Powell said he was among a majority of officials at their last meeting, in July, to conclude that they had met their inflation “progress” test for tapering asset purchases. That leaves the employment shortfall as the remaining hurdle for a taper. The economy has added around 4.7 million jobs this year through August—closing not quite half of the shortfall that existed in December. They will see one more monthly employment report before their November meeting.

Pace and composition
Investors will look for clues at the press conference about the pace and composition of any taper. New York Fed President John Williams last month indicated a preference for reducing the $80 billion in monthly Treasury purchases and $40 billion in monthly mortgage-bond purchases proportionally, suggesting that some officials’ push to taper mortgages more quickly isn’t in the cards.

Several Fed bank presidents have expressed their own opinions about the pace and composition of a taper, with a general preference to wrap up bond purchases by the middle of next year if the economy evolves as they anticipate. One possible path under consideration would see the central bank reduce its purchases of Treasury bonds by $10 billion a month and mortgage securities by $5 billion a month.

Mr. Powell could also face questions over what might lead Fed officials to delay taper plans, including a standoff in Congress over raising the federal borrowing limit.

Rate projections
Another big question this week is whether most of the 18 Fed officials who submit economic and rate projections will pencil in an interest-rate increase for next year. In June, seven officials thought an increase would likely be warranted in 2022.

Mr. Powell last month stressed that the Fed’s decision about when to slow its bond buying shouldn’t fuel inferences about officials’ intentions to lift rates. But getting that message to stick could be tricky if new interest-rate projections—known as the “dot-plot”—show officials are eyeing more rate increases.

In June, the dot-plot surprised investors by showing most of the officials expected to raise interest rates by at least a half percentage point in 2023. Their March projections showed most didn’t see any increases through 2023.

Officials will also provide for the first time this week their projections for interest rates in 2024, which will shed more light on just how quickly they think rates might need to rise once they have started lifting them.

Economic outlook
Investors will also play close attention to how officials adjust their expectations for economic growth and inflation in their projections. While the Delta variant of the coronavirus could lead to slower growth and weaker hiring than officials had expected earlier this year, the latest wave of global Covid-19 infections could also exacerbate the supply-chain bottlenecks and shortages that have contributed to higher inflation.

Even if Fed officials remain confident that these pressures would fade on their own, more of them might conclude that the risks of higher-than-anticipated inflation, as opposed to lower-than-anticipated inflation, could be rising.

Officials are likely to raise their inflation forecast for this year and lower their growth forecast. But the projections for inflation at the end of next year and 2023, together with their rate projections, could provide more meaningful information about how they see the economy evolving as it moves beyond the most acute phases of the pandemic.

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