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 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 $80 billion in Treasuries and $40 billion 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." 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 minutes from the June meeting suggested there was split support, with 'several' favoring MBS first, and 'several' saying it's not worth it," said Bloomberg economist Andrew Husby. "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."
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 Aug. 26-28 policy retreat in Jackson Hole, Wyoming, where Powell is likely to speak, or at the Sept. 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.
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 favor a rate hike in 2022.
Hugh Johnson, chairman and founder of Hugh Johnson Advisors, said he expects Fed policy to "remain benign" until the second half of 2022” with a "shift toward restraint likely" in the first quarter of the following year.
The increased interest-rate forecasts come amid a rise in inflation with reopening causing big increases in prices for used cars, hotels and airfares, among other purchases. Consumer prices rose 5.4% in June from a year ago as measured by the consumer price index, the fastest increase since 2008.
The FOMC will keep the language in its statement this month that the inflation surge mostly reflects transitory factors, according to 96% of the economists. Those surveyed mostly agree, with 78% saying the transitory statement is accurate.
"Much of the rise in prices will likely prove transitory, although wage pressures stemming from fiscal policy will likely be more sticky," said Lindsey Piegza, chief economist with Stifel Nicolaus & Co.
Still, three quarters of economists say the risks on inflation are to the upside compared to FOMC forecasts, which is the biggest concern they have in looking at economic risks.
Powell's current term as Fed chair expires in February. Four-fifths of the economists expect Biden to keep him in the job, an overwhelming number that's risen slightly from June.
Powell has deflected all questions on whether he'd serve four more years if asked, leaving the impression intact that he'd like to stay at the helm. He has broad support for another term among top Biden aides, though the decision is expected later this year and hasn't yet been put in front of the president, according to people familiar with the matter.
Fed Governor Lael Brainard, a Democrat, is seen as the most likely alternative choice of 16% of economists surveyed.
