Fed Chairman Jerome Powell’s press conference on Wednesday appeared to calm markets, with DJIA stocks,
again hitting record highs and no further flattening of the TMUBMUSD10Y yield curve,
“President Powell actually walked pretty well on the fine line today and accomplished what he wanted,” said Katy Bostjancic, chief financial economist in the United States at Oxford Economics.
As expected, the Fed announced that it was slowing its bond purchases by $ 15 billion per month from mid-November. At this rate, the $ 120 billion in purchases will come to a complete end in June.
Powell’s tone suggested that there was no rush to raise interest rates soon after the stall was over, but also a willingness to act quickly if needed, said Jim O’Sullivan, Chief US macro strategist at TD Securities.
“We don’t think it’s time to raise rates now. If we find it necessary to do it, we will be patient, but we will not hesitate, ”said Powell.
Walking a fine line also means the president has bypassed minefields and tough questions. Here are some of the puzzles that remain from his press conference:
Prospects for economic growth
Powell was particularly silent on his forecast for US gross domestic product in 2022. His prepared remarks only mentioned the expected resumption of growth in the current quarter from October to December. Economists aren’t worried about this quarter, but doubts are emerging about growth next year.
With the focus on “inflation, inflation, inflation, there wasn’t much time to cover much else,” said Jeffrey Cleveland, chief economist at Payden & Rygel Investment Management. Some of the spending we’ve seen has been driven by fiscal stimulus and purchases related to the pandemic, he said. “If the pandemic ends and transfers don’t repeat, wouldn’t growth slow down? ” He asked.
What would it take for the Fed to accelerate the slowdown in bond purchases?
In its statement, the Fed said the committee expects the pace of the $ 15 billion monthly reduction in bond purchases to be “probably appropriate each month,” but left the door open to a more rapid pace. fast by not setting the actual pace beyond December.
When asked what it would take for the Fed to deviate from the reduction path of $ 15 billion per month, Powell objected, saying, “I’m not going to give you much more detail. . “
Diane Swonk, chief economist at Grant Thorton, said she believes the Fed has been increasingly divided since the summer. She sees the hawks pushing to pick up the pace of buying in early 2022. “This will open the door to faster and more aggressive rate hikes. We now expect three rate hikes next year, ”Swonk said, in a note to clients.
A clean look at the post-delta economy variant
During his press conference, Powell said he was waiting for the delta variant of COVID-19 to subside before getting a good read on the economy.
But that could be wishful thinking, said Michael Feroli, chief U.S. economist at JP MorganChase.
“I’m not so confident that we’ll have a clear picture of the economy in the next couple of months. Powell is a little more optimistic about this than I am, ”Feroli said in an interview with Bloomberg. He noted that the coronavirus was starting to increase a bit in the northern states as the weather cooled.
In the end, the market did not move
Despite Powell’s dovish stance, the market did not change its rate hike expectations after the meeting, noted Robert Perli, head of global policy at Cornerstone Macro.
Read: Fed still thinks spike in inflation is transitory, but hedging bets
“It will take clearly lower inflation to persuade the markets to reverse their expectations, and that will take time,” Perli said in a note.