ANKARA
Jerome Powell’s shift toward a hawkish stance signals that the US Federal Reserve will strike a similar tone after its next meeting on Dec. 15, an expert said on Wednesday.
“The Fed is going to announce that it’s accelerating its tapering process at the December meeting, unless the omicron variant of COVID-19 becomes a clear threat to the outlook, or there is a meaningful risk that the US could temporary breach the debt ceiling,” Ryan Sweet, an economist at Moody's Analytics, told Anadolu Agency via email.
“The risks that the Fed would increase the amount it reduces its monthly asset purchases have risen noticeably after the October consumer price index, which likely altered the central bank’s near-term forecast for inflation,” he added.
Sweet said his assumption was that the Fed would increase the size of the taper by $10 billion to $25 billion per month, but risks are weighted toward a more aggressive move after Powell’s Senate appearance on Tuesday.
After its Nov. 3 huddle, the Fed announced it would start winding down its $120 billion asset purchases this month, a process known as tapering, and expects it to be concluded by mid-2022.
The central bank, however, said earlier this month that it could alter the tapering process based on incoming macroeconomic data and the US’ overall economic outlook.
However, as annual consumer prices soared 6.2% in October, the highest in 31 years, Powell struck a more hawkish tone in his testimony before the Senate Banking Committee on Tuesday.
“The economy is very strong and inflationary pressures are high. It is, therefore, appropriate in my view to consider wrapping up the taper of our asset purchases perhaps a few months sooner,” he said.
His prepared remarks, though, had a more dovish tone, as Powell noted that the surge in COVID-19 cases and emergence of the omicron variant “pose downside risks to employment and economic activity and increased uncertainty for inflation.”
“Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions,” he explained.
‘Time to stop describing inflation as transitory’
Sweet agreed that Powell was “less dovish” in his testimony before the Senate.
“Though the Fed has divorced their balance sheet policies from interest rates, markets think the divorce isn’t official. After Powell’s comments, stock prices dropped and the short-term Treasury yields rose, causing the yield curve to flatten,” he said.
Major indices in the US stock market plummeted after Powell’s comments on Tuesday.
The Dow Jones fell by 652 points, or 1.86%, the S&P 500 dropped 1.9%, and the Nasdaq dove 1.55%. The yield on 10-year US Treasury notes decreased by almost 6%.
The Fed chair also said during his testimony that it is time to stop describing inflation as “transitory” – a word he has repeatedly used over past months.
“This is a not-so-subtle hawkish shift from Powell, signaling the December post-meeting statement will strike a similar tone,” Sweet said.
“He also gave a heightened sense of urgency to reduce their asset purchases quicker as it noted that each additional dollar of asset purchases increases policy accommodation, something he doesn’t believe the economy needs now.
“The Fed is now preemptively going to fight any further deterioration in its price stability mandate as opposed to being preemptive supporting growth and the labor market. In other words, further acceleration in inflation will trump downside surprises in growth or the labor market. This change in the weight in their reaction function is a noticeably hawkish shift,” Sweet explained.
Powell had also repeatedly stressed for the past year that the Fed would not make a rate hike until labor market recovery and full employment are achieved.
Rising inflation, however, may force the Fed to increase interest rates sooner than the end of 2022, and the first rake hike could come in September, or even June, next year.
In this respect, all eyes will be on the Fed’s December meeting and the summary of economic projections it will release.
“If the Fed doubles the pace of accommodation, that would noticeably increase the odds of the first rate hike next June, as asset purchases would be zero by the end of March or early April,” Sweet concluded.
