Fed may delay tapering depending on fiscal policies: Expert

Experts say tapering to be formally announced in November, 1st reduction likely in December with $15B per every FOMC meeting

Ovunc Kutlu   | 23.09.2021
Fed may delay tapering depending on fiscal policies: Expert


The US Federal Reserve may need to delay its tapering timeline depending on fiscal policies, said Mark Zandi, chief economist at Moody's Analytics.

Moderation in the pace of the Fed's $120 billion monthly asset purchases may soon be warranted, indicating tapering would begin soon, a Federal Open Market Committee (FOMC) statement said on Wednesday at the conclusion of the Fed's much-anticipated two-day meeting.

The Fed Chairman Jerome Powell later said the bank may conclude tapering – the process of reducing accumulating $120 billion monthly assets on its balance sheet – by the middle of 2022.

Besides the Fed's monetary stance, however, there are fiscal issues such as the US government facing a shutdown, and the US Treasury's debt limit.

"Congress has a Sept. 30 deadline to renew expiring government spending authority for the 2022 fiscal year that begins Oct. 1. Failure to do so would result in a government shutdown," Zandi told Anadolu Agency via email on Thursday.

"Then there is the Treasury debt limit, which was reinstated on Aug. 1 of this year. Unable to borrow more, Treasury has been using its available cash to pay its bills, but by mid- to late October those funds will be exhausted," he added.

The US House of Representatives passed a bill on Tuesday, in a 220-211 vote with all Democrats in favor and none Republican support, which would temporarily fund the government and suspend the debt limit. However, it may fail in the Senate where Republicans are expected to block it.

Tapering may start in December

Zandi said the Fed continues to "slowly ween the economy from its extraordinary pandemic support."

With the latest $1.9 trillion stimulus from US President Joe Biden administration, total US federal aid during the pandemic climbed to around $5 trillion since March 2020.

"Policymakers suggested that the Fed’s bond buying will begin to wind down beginning in December," Zandi said.

"Policymakers didn’t provide details on the composition of the tapering, but that will come at the November FOMC meeting when they will likely make the formal tapering announcement," he added.

Ryan Sweet, leading US economist at Moody's Analytics, told Anadolu Agency via email that the Fed may formally announce tapering plans in November and the first reduction may occur in December.

He explained that the first cut in purchases may occur in December, while the pace of tapering would be $15 billion per every FOMC meeting – split between $10 billion in Treasuries and $5 billion in mortgage-backed securities.

"Turning to November, the Fed has signaled that it wants tapering to be on autopilot. Once its monthly asset purchases have been reduced from $120 billion to zero, the Fed will reinvest proceeds from maturing assets to ensure its balance sheet does not contract since that would amount to contractionary monetary policy," he noted.

"We do not believe the Fed will want to rapidly reduce its asset purchases. That could signal to the bond market that the central bank is worried about the economy overheating, or that the recent burst in inflation is not transitory," he added.

First rate hike in 2022

The Fed also indicated on Wednesday its first interest rate increase, of 25 basis points, may come next year. There could be four more rate hikes in 2023 of 0.25% each, which are up from an estimated two hikes made in June projections.

"This would be consistent when the US economy has returned to full employment and inflation is consistent with the Fed’s 2% through-the-business cycle target," Zandi said.

Sweet noted that although the first-rate hike has moved from 2023 to 2022, "the pace of tightening isn’t aggressive."

"There was some movement in the Fed’s so-called dot plot. Now nine [FOMC participants] anticipate at least a single rate hike in 2022, compared with seven previously," he said.

"The Fed is evenly split between raising rates for the first time in 2022 or 2023, but we believe Powell and the Fed governor’s dots are in 2023," he added.

Zandi concluded by saying "Financial markets took the Fed’s announcement in stride, and even appear cheered by the announcement."

After massive losses on Monday, US stock exchanges opened higher on Wednesday and finished the day strong.

The Dow Jones and the S&P 500 rose 1% and 0.95%, respectively, while the Nasdaq increased 1.02%.

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