The Federal Reserve announces the Interest Rate Decision and releases the Monetary Policy Statement at 18:00 GMT and as we get closer to the release time, here are the expectations as forecast by analysts and researchers of 13 major banks. The Fed is widely expected to announce a reduction of $15 billion in monthly asset purchases while keeping the policy rate unchanged.
ING
“A November 3rd taper announcement looks like a forgone conclusion. It seems set to start in November with asset purchases reduced by USD15 B each month, split USD10 B Treasuries and USD5 B Agency MBS. The plan is for its purchases to be reduced to zero by June, but with the economy growing, creating jobs and likely experiencing elevated inflation through to at least the middle of next year we think it could be concluded more swiftly. We don’t think interest rate increases will be far behind. We have been forecasting two interest rate increases in the second half of 2022 for quite some time – once in September and once in December. However, given the evident intensification of inflation pressures the risks are increasingly skewed towards the Federal Reserve taking a more aggressive position and hiking three times, starting in July.”
Westpac
“Prior to the pre-meeting media blackout, numerous members of the FOMC expressed support for a formal taper decision at the November meeting. They also gave similar guidance on its length, with mid-2022 seen as the optimal end date. Beginning in December, this process will see bond and RMBS purchases by the Federal Reserve reduced by a combined USD15 B per month. With this decision essentially a done deal for the market, participants will be focused on any discussion around the next steps for policy beyond the taper. We expect Chair Powell and the FOMC will recognise the risks with respect to inflation, but like the BoC be in no hurry to signal rate increases, with December 2022 still the most likely starting point.”
Danske Bank
“We expect the Fed will announce QE tapering at next week’s meeting. We expect the Fed to start tapering immediately in November with a tapering pace of USD15 B per month (completed in June). Risk is tilted towards a higher tapering pace of USD20 B per month. Fed Chair Jerome Powell sounded more concerned about high inflation on Friday, which we expect him to repeat on Wednesday. We expect Powell to repeat that the tapering decision is not related to a future decision on rate hikes. Still, we expect the rhetoric to be more hawkish than in September.”
TDS
“Fed officials will almost certainly announce the start of tapering. As for ‘liftoff,’ we don't expect any definitive new signals, and we expect ‘elevated’ inflation will continue to be characterized as ‘largely reflecting transitory factors,’ but the chairman will likely emphasize how tapering will give officials flexibility in responding if the economy evolves in a way that deviates significantly from current expectations.”
Rabobank
“The FOMC meeting is expected to conclude with a formal announcement of the start of tapering. There will be no update of the economic and rate projections). During the press conference, Powell is likely to stress again that the end of tapering does not automatically mean the start of hiking. And that the high inflation readings are transitory. We’ll put USD5 in the Atlanta Fed’s swear jar.”
RBC Economics
“The FOMC next week is expected to announce it will taper its bond-buying program to USD10 B in Treasuries and USD5 B in mortgage backed securities, and commit to wind down net purchases around mid-year 2022.”
SocGen
“We look for the Fed to announce a reduction in the pace of current holdings of USD15 B per month. At present, the Fed purchases USD120 B per month, consisting of USD80 B of Treasury securities and USD40 B of mortgage-backed securities. It is expected to reduce Treasury purchases by USD10 B per month and mortgage-backed securities by USD5 B per month. By reducing in increments of USD15 B per month, the Fed should end its asset purchases by the middle of 2022.”
NBF
“Based on recent Fed communications, a taper of the central bank’s asset purchase pace is all but assured to be unveiled. The pace of reduction is likely to be set at USD15 B/month (allocated proportionally between Treasuries and MBS), which would imply completion of the tapering process midway through next year. The statement will surely acknowledge elevated inflation and we’ll be keen to see if the Fed opts to drop its ‘transitory’ assessment of inflationary pressures. There will be no accompanying summary of economic projections presented – that will come in December – but the balance of risks is very clearly skewed to a more hawkish dot plot given ongoing inflationary pressures. However, Powell may remain non-committal in the press conference on the timing of future interest rate adjustments and reiterate that tapering asset purchases is not a signal that interest rate hikes are imminent.”
CIBC
“Powell might not have the votes to be an all-out hawk, or the nerve to deliver a very stern message on rates before his reappointment is a lock. But giving the green light to start tapering now, and doing so on a tight timetable, would be a clear signal that the Fed wants to get that out of the way in time for a couple of rate hikes in the latter half of next year.”
Nordea
“The Fed is ready to pull the tapering trigger this Wednesday and we see risks clearly tilted towards a swifter process than anticipated by the consensus. Powell will hence have to be very concrete rhetorically to avoid a copy/paste of what RBA, BoC and BoE have triggered in the very front-end of the respective yield curves. Unless Powell and the FOMC explicitly state that nothing can happen on the policy rate until a certain date, we expect markets to chase rate hikes even further after the policy decision to start tapering.”
ABN Amro
“Fed will seek to push back on rate hike expectations – but how aggressively? The key question going into this meeting will be to what extent the Fed pushes back against market pricing, which now suggests the Fed will begin raising rates by the middle of 2022. We continue to think there is a high bar for the Fed to row back on its signalling that the end of asset purchases would not be immediately followed by rate hikes. As such, Chair Powell will likely push back against the recent shift in market expectations. However, it might be difficult to do this with credibility at this stage, with markets likely awaiting a convincing turnaround in inflation dynamics before rate hike expectations unwind. This is not likely in the near term – if anything, we expect a reacceleration in monthly inflation in the US over the coming months, with price growth cooling again in the first half of 2022. Consistent with this, we continue to expect the Fed to look through the current elevated inflation, and to begin hiking in early 2023.”
Citibank
“We do not expect Chair Powell to strongly push back against the market pricing of earlier Fed rate hikes. Tapering USD120 B in asset purchases is widely expected to be announced. We expect a mid-November start of a USD 15B/month reduction. That pace, however, may likely be left relatively flexible, giving Fed officials the option to bring forward the end of tapering and the potential first-rate hike. Citi’s base case remains the first Fed rate hikes in Dec-22, but inflation concern could lead to scenarios with faster tapering of asset purchases and earlier hikes.”
Deutsche Bank
“Our view is that the Fed will announce monthly reductions of USD10 B and USD5 B in the pace of Treasury and MBS purchases respectively, with the first cut to purchases coming in mid-November. We see this bringing the latest round of QE to an end in June 2022, though this would also offer some flexibility to respond to any changes in the economic environment over the coming eight months should they arise. On the question of rate hikes, we think lift-off won’t take place until December 2022, but don’t see Chair Powell actively pushing back on current market pricing (a full hike nearly priced in by mid-year 22) given the elevated uncertainty about the outlook, particularly on inflation.”
See – Fed Preview: Five dollar-moving things to watch out for on the historic tapering announcement