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Fed will start cutting bond purchases in Q4

A Bloomberg survey of economists showed that the Federal Reserve will begin to cut back purchases of bonds, which now have a monthly volume of $ 120 billion, in the 4th quarter of this year, as the US economy continues to recover from the Covid-19 pandemic. Expectations shifted towards the end of the year, slightly earlier than in the March poll. The first hike in the Fed fund rate is still expected no earlier than 2023.

Bloomberg Chart

The first Central Bank to announce tapering was the Bank of Canada, which said last week that it would reduce purchases of government bonds and bring the terms of a possible rate hike closer. The European Central Bank at a meeting on April 22 strangely nodded at the Fed, linking its decision with the policy of the American regulator. About 45% of economists surveyed expect that the Fed’s Open Market Committee (FOMC) will announce QE rollback in the fourth quarter, and 14% believe that this will happen in the third quarter. 49 economists were interviewed. The survey was conducted on April 16-21.

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The next two-day FOMC meeting will end this Wednesday. The market is awaiting confirmation of the ultra-liberal monetary policy, that is, maintaining the target range of the federal funds interest rate from 0-0.25% and the above-mentioned QE volume. The decision will be announced at 21:00 Moscow time, and half an hour later, a virtual press conference by the chairman of the central bank Jerome Powell will start.

Powell had previously promised to warn the markets of the impending tapering, but so far this is not expected of him – despite the economic improvement and the increase in the number of vaccinated.

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“We think it’s too early, given the Fed’s insistence on focusing on sound economic data rather than expectations for improvement,” said Gero Jung, chief economist at Mirabaud Asset Management. “In our view, the Fed wants to see a series of very positive data, such as the March labor market, before it starts rolling back.”

More than two-thirds of respondents believe that the Central Bank will give an early signal about the curtailment of QE this year, while the majority of respondents – 45% – predict such a hint in the third quarter. Most of the survey participants believe that the rollback of bond purchases will last from 7 to 12 months.

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Interest rates are unlikely to be raised until 2023, economists say. At the same time, the FOMC itself predicted even later tightening in March. Rates are likely to rise 50 basis points to 0.75% by the end of 2023 and to 1.25% by the end of 2024, the median estimate of survey participants suggests.

Betting options also show that it is too early to worry about tapering before the June meetings of the world’s largest central banks. Based on materials from Bloomberg

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