Bloomberg / Washington
The Federal Reserve will start scaling back asset purchases next year with an emphasis on mortgage-backed securities, according to economists surveyed by Bloomberg, who see the central bank raising interest rates at a quicker pace through 2024 than previously thought.
Slightly more than half expect MBS tapering will happen proportionally faster than for Treasuries. Several regional Fed presidents are advocating for that approach to cool the housing market, though Chair Jerome Powell and New York Fed chief John Williams have sounded lukewarm to the suggestion.
The economists also see two quarter-point rate hikes by the end of 2023 – matching the median projection of Fed officials published in June – with three more increases in 2024.
That’s more than predicted in the June survey. A large majority of them continue to expect President Joe Biden will renominate Powell as chair.
The poll of 51 economists was conducted July 16-21.
The Federal Open Market Committee concludes its two-day policy meeting on Wednesday and is expected to hold rates near zero and continue monthly purchase of $80bn in Treasuries and $40bn in mortgage securities. Officials have pledged to maintain bond buying until the economy shows “substantial further progress” on inflation and employment as it recovers from Covid-19.
There are no published FOMC forecasts this meeting. While the committee will discuss its tapering plans, Powell has indicated he believes it’s too early to slow stimulus.
“The Fed is far from debating when to raise rates,” Scott Brown, chief economist with Raymond James Financial, said in a survey response. “Tapering may be hinted at, at Jackson Hole or the September FOMC meeting” with a “formal announcement by November, starting in early 2022.”
“The minutes from the June meeting suggested there was split support, with “several” favouring MBS first, and “several” saying it’s not worth it. That mixed support and easier communication leads us to think they’ll go at the same time, and on even glide paths. The Fed view is these purchases aren’t meant to specifically support the housing market, so a faster taper would implicitly mean they’re walking back that view,” says Andrew Husby, economist at Bloomberg.
Much of the FOMC discussion will focus on when and how to taper its securities purchases, and a consensus is emerging among economists on how the plan will unfold.
Three-quarters of economists expect either an early signal at the Kansas City Fed’s August 26-28 policy retreat in Jackson Hole, Wyoming, where Powell is likely to speak, or at the September 21-22 FOMC meeting, when the committee updates its quarterly forecasts.
That is likely to be followed by a formal announcement of tapering in December, in the view of nearly half of those surveyed, and actual reductions starting in the first quarter of 2022, according to 71% of the economists.
In the survey, 8% said the Fed will start with an MBS only tapering, while 46% said the reductions will be in equal amounts, effectively ending mortgage purchases long before Treasuries. That’s an approach suggested by Boston Fed President Eric Rosengren. Another 46% say the reductions should be proportional to the buying.
The goal will be “a mechanical reduction each month – I think they’ll go with $10bn per month,” said Thomas Costerg, senior US economist at Pictet Wealth Management. The process will be “like watching paint dry,” he said, echoing the characterisation of the last time the Fed tapered bond buying by officials including then-Chair Janet Yellen.
MBS tapering has been one of the more contentious issues, with St. Louis Fed President James Bullard and Governor Christopher Waller supporting an early focus on reducing them because of the hot housing market. Powell in congressional testimony said MBS and Treasury purchases have about the same effect on the economy, an argument also made by Williams.
More than half of the economists expect tapering to last 10 to 12 months, which would wrap it up before the end of 2022 if it starts early in the first quarter.
Some Fed officials say they want to finish tapering before raising rates and their median forecast shows them on hold through next year, though seven of 18 officials did favour a rate hike in 2022.
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