The Federal Reserve is expected to announce it will begin trimming its $120 billion in monthly asset purchases before the end of the year as the U.S. economy recovers strongly from Covid-19, according to economists surveyed by Bloomberg.
That’s a bit earlier than forecast in the March survey but leaves Fed 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 survey, about 45% of the economists expect the Federal Open Market Committee to announce tapering in the fourth quarter with 14% seeing that happening in the preceding three months. The survey of 49 economists was conducted April 16-21. The result is a hawkish shift from March when slightly more viewed tapering as a 2022 event.
The FOMC concludes its two-day meeting on Wednesday and is expected to reaffirm plans to only adjust purchases once the U.S. economy achieves “substantial further progress” toward its employment and inflation goals. Nor is the Fed expected to raise the target of its benchmark rate from a zero to 0.25% range. The FOMC policy statement will be released at 2 p.m. Washington time with Chair Jerome Powell holding a virtual press conference 30 minutes later.
Economists say they will scrutinize the statement language and press conference for hints of a potential tapering. Powell has said he’ll alert markets well in advance of that change when the committee views its goals in sight, and that a policy change will hinge on actual incoming economic reports, not just bullish forecasts.
“We think this is too early, given the insistence of the Fed to focus on ‘hard’ economic data and not expectations for improvement,” said Gero Jung, chief economist at Mirabaud Asset Management. “In our view, the Fed wants to see a sequence of very positive data—like the March jobs numbers—before starting to initiate a tapering process.”
Employers added a much-better-than-expected 916,000 new U.S. jobs last month.
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—45%—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 economic data have supported the Fed’s view of a robust rebound this year, with unemployment dropping and inflation expected to exceed 2% 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% with inflation at 2.1%, measured by the personal consumption expenditures price index.