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The U.S. Federal Reserve could begin paring back its $120-billion monthly purchase of government and mortgage bonds within six weeks and be ready to raise interest rates next year, the Fed announced after its policy meeting last week.
The Fed has been buying $80 billion in government bonds and $40 billion in mortgage bonds every month since June 2020.
“The purpose [of the announcement] is to put notice that” a decision to begin trimming bond purchases “could come as soon as the next meeting” on 2 November, Fed chair Jerome Powell said in a post-meeting news conference.
Most policy committee members agreed that the bond purchases ending “around the middle of next year is likely to be appropriate,” Powell said.
Following the announcement, the Dow Jones Industrial Average bounded up more than 500 points on the news; the NASDAQ and Standard and Poor’s 500 each added 1 percent.
Nine of the 18 committee members now expect to raise interest rates next year, compared with 13 at the June meeting who thought a rate hike could be put off until 2023, which we reported in our “U.S. Markets Overview” on 22 June, 2021.
Half those present in the meeting think rates will need to increase by a full point by the end of 2023, from their current 0.25 percent, and add another three-quarters of a percentage point in 2024.
Again, as though they didn’t know it before, now more Fed officials than previously, expect inflation to run hotter next year than they had forecast at the June meeting. With inflation running higher, they are now selling the line that not only will rates rise next year, but they will jack them up more than once in 2023.
To make such a long term forecast has nothing to do with reality. It is purely a guessing game that is engineered to keep markets flying high now with the reality on The Street that what the Fed will do in 2022 and 2023 will depend on the state of interest rates and the economy at that time.
“I came away thinking Federal Reserve officials are somewhat more concerned about elevated risks of inflation and they see the possibility that inflation could be more persistent,” economist Tiffany Wilding at Pacific Investment Management told The Wall Street Journal.
Powell is prepared to admit as much in Congressional testimony this week (see related story).
An increasingly successful vaccination campaign and $2.8 trillion in federal stimulus spending has created a swift recovery, but that has sent inflation galloping at more than twice the Fed’s 2-percent target rate.
A high inflation rate could be sustained by the impacts of the COVID virus’s Delta variant, coupled with commodity shortages and snarls in global logistics, and could slow growth.
Powell, as the Fed’s public voice, has previously downplayed speculation about rate increases, saying the criteria for raising rates was more stringent than those needed to start tapering bond purchases.
However, the Fed’s internal calculations now are persuading more central bank officials that they likely need to raise rates sooner than they have been planning.
Yields on 10-year treasury notes rose from 1.306 percent before Powell’s comments to 1.332 at the end of the trading day, the WSJ noted; the two-year yield moved from 0.214 percent to 0.24.
Because yields rise as bond prices fall, the movement indicated investors’ cautious optimism about the economy’s future in the wake of Powell’s statements.
TREND FORECAST: As we have long forecast, when interest rates go up, the equity and housing markets will significantly weaken. When interest rates increase to the 1.5 percent range, both sectors will crash.
The Fed is fully aware of this, thus, despite the talk of rates rising, even if they go marginally, it will put immediate downward pressure on housing and equities which are bubbles that are ready to burst.