The Federal Reserve is expected to finalize the ground on Wednesday to reduce its monthly property purchases by the end of the year, revealing in its latest forecasts the extent to which the higher-than-expected inflation rate or the resurgence of the corona plague is hurting the economic picture.
Fed policymakers, who have completed a two-day round of meetings, facing a string of conflicting developments since late July – signs of a slowdown in the services sector, a resurgence of the corona virus that overshadowed last summer, and weak U.S. labor market growth data in August, joining still strong inflation – Debating among themselves how to act in response.
According to most officials, the economic recovery will continue and allow the US Federal Reserve to advance in its plan to reduce its $ 120 billion monthly purchases of government bonds and mortgage-backed bonds by the end of 2021, and to halt purchases for the first half of next year.
External forecasters and analysts, however, expect the Fed to set a precise date for the start of the downturn, linking it to a recovery in labor market growth, after alarmingly lukewarm August, when only 235,000 jobs were added in the US.
The Fed is set to release its latest economic announcement and forecast on Wednesday. Fed Chairman Jerome Powell will hold a press conference about half an hour after the policy is announced, where he will discuss the results of the announcement.
The statement is likely to acknowledge that the U.S. economy has taken another step toward the same “significant further progress” the Fed sought to see in the job market before it began reducing its bond purchases, according to analysts Ante Markowska and Thomas Simmons of Jefferies.
While labor market growth in August was disappointing, wages in the U.S. non-agricultural sector swelled to just over $ 1 million in July, rising by an average of 716,000 news a month since May.
Still, high-frequency trading data in the capital markets and alternative employment indicators suggest that growth in near-term jobs will also disappoint, and analysts at Jeffries believe the first practical reduction in asset purchases is likely to be “conditioned by a handsome growth in the U.S. job market in September.”
The US labor market was left with a shortage of about 5.3 million jobs from its level before the outbreak of the corona plague.
More than 60 percent of economists surveyed by Reuters said they expect the decline in bond purchases to begin this coming December.
Federal Reserve officials, however, may decide they need more time to assess the risk of a variety of issues still evolving before deciding to move forward with a reduction in the emergency bond purchase program. Financial markets have been rocked in the past week Evergrande Group (HK :), and the index started the week with its biggest daily decline in four months.
Meanwhile, U.S. lawmakers have failed to come close to a decision by Congress, split on a party basis, regarding raising the federal debt ceiling, with the potential for a partial shutdown of the federal government growing daily.
| Snapshot of Inflation
When the reduction in bond purchases does come, it will be a sign of a first move away from the steps taken in March 2020 to help the U.S. economy during the Corona plague, and towards a more routine monetary policy that will eventually include a higher interest rate.
Powell, who apparently knew even before the Fed’s policy meeting scheduled for November 2-3 whether US President Joe Biden would appoint him to a second term as central bank chairman, stressed in several media speeches, including a speech at a Fed research conference Of Kansas City last month, that the actual start of reducing bond purchases is unrelated to discussing the interest rate. This is a point he is expected to reiterate on Wednesday.
However, the economic performance forecasts and the new policy rate of the policy makers will give little idea of the speed with which the rate hike may occur after the reduction in purchases, especially if the high inflation rate caused officials to mark next year as a target for interest rate hikes.
The Fed’s preferred rate as of July was about 4.2% on an annual basis. This is double the 2% target set by the US Federal Reserve, and in the opinion of some officials, enough to meet the central bank’s new promise to let the inflation rate remain moderately above this target for some time, thus ensuring that the target is reached on average – a preliminary step to raise interest rates.
- Reuters contributed content to this article.