Federal Reserve policy makers are expected to announce this week that they will start scaling back their massive asset-purchase program amid greater concern over inflation, economists surveyed by Bloomberg said.
A majority of the 49 economists in the survey predicted the U.S. central bank will
The Federal Open Market Committee meets for two days starting Tuesday and will issue a policy statement at 2 p.m. in Washington Wednesday. There will be no quarterly economic and rate forecasts published at this meeting. Chair Jerome Powell will hold a press conference 30 minutes later.
Tapering
“A Nov. 3 taper announcement looks a forgone conclusion,” James Knightley, chief international economist at ING Financial Markets LLC, said in a survey response. With inflation persisting, “the taper could end more abruptly than currently signaled with a high probability of at least two interest-rate increases in the second half of next year.”
Almost all the economists expect the FOMC to announce tapering this meeting, which is in line with Powell’s comment on Oct. 22 that “I do think it’s time to taper.” Nearly two-thirds expect the slowing in bond buying to begin this month, with most of the rest looking for a December kickoff. The committee discussed options for both months in its prior meeting in September, according to minutes of that debate.
The committee’s most contentious decision at the upcoming meeting may be how long the tapering should last.
While most economists expect bond purchases will be reduced by $15 billion every month — in a process that would wrap up around the end of June — a separate question in the survey revealed a number who think the Fed may decide to speed up. That showed 35% expecting the taper to be completed in seven months or faster, versus 51% who expect it will take eight months.
A quicker end to the tapering would give the policy makers the flexibility to raise interest rates earlier than otherwise, because Powell and others have said they want to end the taper before moving to possible hikes.
Inflation Risks
Most of the economists see upside risks to inflation, a view that echoes that of Powell and other central bankers who have spoken recently. They see the risks to economic growth as more uncertain, with 41% putting them as roughly balanced and 45% seeing risks to the downside.
“The risks of too high inflation for too long and the possibility of an emerging conflict between the Fed’s dual goals will be in focus for the meeting and may be acknowledged in the statement,” said Elisabet Kopelman, U.S. economist for Skandinaviska Enskilda Banken AB.
While FOMC officials have generally expressed confidence that Americans’ expectations for inflation over the medium and long term are well anchored, reflecting a view that price gains will come down from recent elevated levels, the economists are less sure. In the survey, 52% described inflation expectations as consistent with the Fed’s goals, while 44% saw them as out of line.
The meeting takes place amid intense focus on whether Powell will be renominated, with his term as chair ending in February.
As President Joe Biden considers openings for the top Fed job and other slots, 79% of the economists expect Biden to keep him in the job — still an overwhelming number but one that’s dropped slightly since September. Fed Governor Lael Brainard, a Democrat, is seen as the most likely alternative, with 13% of economists predicting she will be chosen as chair.
