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Sept. 22, 2021, 9:34 a.m. EDT

Fed could fracture in 2022 over when to raise interest rates, economist says

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By Greg Robb

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Former New York Fed President William Dudley said Monday he wished the Fed was a little more flexible about when it would be willing to raise interest rates.

“The current regime, where they don’t do anything until they reach the maximum state of employment in their mind, might turn out to be too late,” Dudley said in an interview on Bloomberg Television.

A period of calm could persist for the first half of 2022 and the Fed can “wait and see” about inflation, Englander said.

Over this time, Powell is likely to continue to stress that the timing of the taper “will not be intended to carry a direct signal” on the timing of any rate hikes.

The hawks are also not seeking to spook markets and are keeping their powder dry months before the Fed is in any position to make a decision.

“Even the most hawkish hawk sounds very nice, [saying] the economy is going to be where it is supposed to be so we can move quicker. I think they are trying almost purposefully to avoid a situation where the market says ‘oh my god, these guys are really hawkish and they’re on the warpath’,” Englander said.

The consensus is that the Fed won’t start to raise interest rates until after it has slowly ended, or tapered, its purchases of $120 billion of bonds each month. That could take six to eight months depending on the pace.

At their meeting this week, economists think the Fed will drop a big hint that it will begin to taper asset purchases this year.

Read: Powell to seek compromise tapering plan

Fed hawks care more about when the bond purchases end than when they start.

Hawks want the Fed to have ended its asset purchases by next June to leave room for one hike. And if inflation remains high, they might press for two hikes, Englander said.

The worst case scenario for Fed officials next year will be ambiguous data.

For instance, if the core rate of inflation is running around a 2.7% annual rate next year, the hawkish FOMC voters may view this as signaling a need to act, while doves may wish to give inflation more time to dissipate on its own, Englander said.

The result could be a deadlocked committee and market uncertainty.

The yield on the 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +1.39% rebounded somewhat Tuesday after slumping on Monday fears of contagion from a weakening property sector in China.   The timing of future interest rate hikes is drawing the attention of bond traders and analysts.

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Dec. 8, 2021 9:47a
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