Tag: The Federal Reserve

Powell Wimps Out

Posted on by George Yacik

Pretty much as expected, the Federal Reserve last week said that, in the face of rising inflation and a booming economy and job market, it would further reduce its purchases of Treasury and mortgage-backed securities and raise interest rates.

But not yet.

Beginning in January, the Fed said it will be buying $60 billion in bonds a month, which is down 50% from the original schedule of $120 billion a month and its recently reduced plan of $90 billion, announced only a month ago. Which means the program will end next March, as opposed to the original termination date of June, at which time the Fed expects to start raising interest rates unless something happens in the meantime.

The Fed is projecting three 25 basis-point increases in its federal funds rate next year, followed by three more in 2023 and two more in 2024. That would put the fed funds rate in a range of 1.4% to 1.9% at the end of 2023, up from a range of 0.4% to 1.1% in its previous projection in September. The current rate, of course, is 0.1%, or near zero. Continue reading "Powell Wimps Out" →

The Battle Against Inflation Begins

Posted on by George Yacik

There shouldn’t be too many surprises coming out of this week’s Federal Reserve monetary policy meeting. The newly hawkish Fed is likely to formally announce its intention to accelerate the tapering of its asset purchases, as Fed chair Jerome Powell told Congress recently, echoed by other Fed officials so that the program ends sometime around March of next year, rather than several months later, in order to ward off the inflation that Powell now concedes isn’t transitory.

The bigger question is, will the Fed actually be successful in putting the inflation genie back in the bottle? After trying unsuccessfully for more than 12 years to lift inflation past its 2% target, why should we now believe that the Fed suddenly has the smarts and the oft-mentioned “tools” to rein in inflation that is now at its highest level in several decades?

The data-driven Fed has more than enough justification to expedite the taper, which would then lead the Fed to start raising interest rates off zero soon after, rather than waiting until sometime at the end of next year or even 2023.

Inflation

On Friday, the government announced that the year-on-year rise in the consumer price index jumped to 6.8% in November, up from 6.2% the prior month and the fastest pace in nearly 40 years. It was also the sixth straight month that it topped 5%, adding further evidence that the rise in inflation this year is anything but temporary. The YOY rise in the core index, which excludes food and energy prices, rose 4.9%, up from October’s 4.6% pace and the steepest increase since 1991.

Does that sound transitory to you? Continue reading "The Battle Against Inflation Begins" →

What To Expect From This Week's Fed Meeting

Posted on by George Yacik

Was last week’s tiny decrease in the August consumer price index just enough to dissuade the Federal Reserve from announcing this Wednesday that it’s planning to start tapering its massive $120 billion a month asset purchase program? The financial markets and the financial press interpreted (hoped?) the report signaled that inflation might really be transitory after all and that the Fed will have no reason to reduce its purchases—at least not yet.

The headline CPI number rose 0.3% from July, slightly below the prior month’s 0.5% jump. The year-on-year increase came in at 5.3%, down a mere one-tenth of a percentage point from July’s 5.4% pace. That prompted near-euphoria from some analysts that the recent spike in inflation over the past five months had mercifully come to an end, giving the Fed little reason to begin the taper soon.

Needless to say, the release a few days before of the producer price index, which jumped 0.7% from the prior month and 8.3% YOY, got much less attention, even though producer prices often presage higher consumer prices. Indeed, many manufacturers have begun to announce they must and will raise prices and make them stick, meaning inflation is anything but transitory.

The Fed, however, is likely to stick to its earlier policy intention to let inflation run “hotter for longer” and not make a commitment to start tapering just yet, despite recent comments from a bevy of Fed officials—including Fed Chair Jerome Powell—that it is poised to do so. The Fed never said what “hotter” or “longer” meant, but five straight months of 4%-plus annualized inflation may not have met the criteria, whatever it is. Instead, Powell has realigned his focus from inflation to the jobs market, fostering full employment being the Fed’s other mandate. And on that score, following August’s disappointing jobs report, we are definitely not in the taper zone just yet. Continue reading "What To Expect From This Week's Fed Meeting" →

Has The Taper Been Tabled?

Posted on by George Yacik

A funny thing happened on the way to the taper, the U.S. jobs market hit a brick wall.

Last week’s underwhelming jobs report for August, which showed the U.S. economy adding only 235,000 jobs—less than a third of the consensus estimate of 740,000 and down sharply from July’s upwardly revised total of 1.05 million, may have put the kibosh on the Federal Reserve’s prospective plan to start reducing its $120 billion a month purchases of government and mortgage securities.

Last month, you’ll remember, Fed chair Jerome Powell, in his Jackson Hole speech, seemed to have joined the bandwagon started by his central bank colleagues calling for the Fed to start the tapering process soon. “If the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year,” he said. However, he also provided this caveat: “Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful.”

Friday’s job report could have provided enough of a reason not to taper, or at least put it on hold. Particularly discouraging was the net no new jobs in the leisure and hospitality industry after adding 350,000 jobs a month over the prior six months, including a net loss of 42,000 jobs in bars and restaurants. Continue reading "Has The Taper Been Tabled?" →

Powell Tempers The Taper Talk

Posted on by George Yacik

Federal Reserve Chair Jerome Powell’s comments at last Friday’s virtual Jackson Hole Economic Symposium received different interpretations from the financial media, but the bond and stock markets seemed to understand that the Fed isn’t going to be embarking on any significant change in its accommodative policies in the near future; i.e., don’t worry about the taper.

According to the Wall Street Journal’s headline, “Powell Says Fed Could Start Scaling Back Stimulus This Year.” But Yahoo Finance had a much more circumspect take. Its headline read: “Powell: Reversing Fed stimulus too early could be 'particularly harmful.’”

“Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful,” Yahoo quoted Powell as saying, although further down in its story, it added an additional quote: “If the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year.”

As several other Fed officials stated, that seemed to seal the deal that the Fed will start the asset tapering process sometime in the fourth quarter and maybe wrap it up early next year. Left up in the air is exactly how much the Fed plans to taper and at what point it will stop, although Powell made it sound like it may not happen at all if economic changes intervene. In any event, the markets seemed to like what Powell said, as stock prices rose and bond yields fell. Continue reading "Powell Tempers The Taper Talk" →