By Greg Robb
Cliffhangers are not the Powell Fed’s style.
Economists think Fed Chairman Jerome Powell has given away the plot twist of next week’s meeting. In two days of testimony to Congress last week, Powell opened the door for the central bank to announce it is doubling of the monthly pace of asset purchases to $30 billion from $15 billion — consistent with quantitative easing ending in mid-March instead of mid-June.
“To have Powell be so open and forthright in his comments last week was very strong guidance they are going to increase the speed of the tapering,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics.
The Fed only adopted the $15 billion pace at the beginning of November.
“A change in course just six weeks after the Fed’s tapering announcement sounded implausible a month ago, but the signals are mounting and market conditions are supportive,” said Ryan Boyle, senior economist at Northern Trust.
What happened? The surprising strength of inflation in October has given the Fed “sticker shock.” With inflation at a 30-year high above 6%, Fed officials want to be prepared to raise interest rates if needed. The central bank doesn’t want to be raising rates while it is still buying securities — which is akin to hitting the accelerator and the brakes at the same time.
The latest reading on November consumer price inflation will come Friday and the acceleration in the price level could be even higher than last month, according to economists and traders.
During his testimony last week, Powell also previewed an important shift in the central bank’s messaging.
Since last year, the Fed’s strategy assumed inflation would lag behind and the Fed could patiently nurture the labor market back to full strengh, know as “maximum employment. In short, the Fed wanted to get the unemployment rate back down below 4%, where it was in early 2020.
But high inflation has upset these plans.
The new message from the Fed is that the best way to achieve full employment is to keep inflation low and stable.
“The risk of persistent high inflation is a major risk to getting back” to a strong labor market, Powell said.
The bottom line?
“Pending what unfolds on the COVID, brace for Fed rate hikes as early as the spring,” said Michael Gregory, deputy chief economist at BMO Capital Markets.
Economists at Barclays are now penciling in three rate hikes next year, coming in March, June and September.
On the other hand, economists note that being prepared to raise rates and actually pulling the trigger are two different things.
TD Securities is sticking with the view that inflation and growth will slow significantly next year, precluding any rate hikes until late 2023.
In the short-term, the real impact for the economy from of the Fed’s pivot will be tighter financial conditions.
Stocks or or investors, the Fed’s shift away from easing will mean tighter financial conditions, said Bostjancic.
Signs of this have already appeared, with increased volatility, some weakness in stocks tied to low interest rates. and a stronger dollar. At some point down the road, tighter financial conditions may serve as a brake on high high the Fed can lift its benchmark interest rate, Bostjancic said. But that is a story for another day.
Stocks /zigman2/quotes/210598065/realtime DJIA +0.29% /zigman2/quotes/210599714/realtime SPX +0.28% were higher on Monday on some abatement of fears about the omicron variant.