On the verge of terms available at the end of the FOMC meeting; It is highly probable that the Central Bank will announce that it will reduce its asset purchases. In this context, it will be possible to put forward a clear planning and, accordingly, to infer when the rate hike may occur at the earliest. Specifically; We think that the Fed may make monthly cuts of 10 and 5 billion dollars, respectively, in its purchases of Treasury bonds and mortgage backed securities (MBS) worth 120 billion dollars. On the other hand; We are now assessing that a timing difference such as November or December does not matter in tapering, and that even if the Fed chooses to wait tomorrow, it will reveal the plan and action on December 15th.
The results of the September meeting strengthened the expectation of tapering in November. On the other hand; When we add factors such as energy prices, rent and wage inflation since September, we think that the Fed has become more rigid in the intervening period, due to the secondary concerns of high inflation expectations and the concern that this will affect long-term inflation. In particular, the effect of the steepening trend of the short-term side on inflation expectations on the slope of the entire curve may cause broad-perspective concerns due to its spillover and sticky effect. This, in turn, may cause Central banks to worry about the warming effect of reflationary policies and to operate the mechanism to withdraw ultra-wide incentives.
The possibility that inflationary pressures do not fade quickly despite the decline in growth momentum causes policy makers to be in a dilemma about worrying about a monetary tightening side effect or too loose policy trap. We think that the Fed has overcome this paradox by distinguishing between tapering and rate hike thresholds. Well; While an equivalent homogeneous economic recovery is not considered necessary for tapering, there is an inflation criterion that should be anchored in a controlled manner; The rate hike will depend on broader adjustment and economic progress.
Rate hike pricing of Fed futures funds… (Source: Bloomberg, CME Group)
The end of the Fed's asset-buying program is one of the first major steps towards loosening the enormous amount of monetary policy support the central bank has provided to keep the economy afloat during the pandemic. In December 2020, the FOMC added language to its meeting statement that asset purchases will continue "until substantial progress is made towards the Committee's maximum employment and price stability goals." The bar for faster inflation was clearly met, and we think the FOMC has seen enough progress on these two fronts to start slowing its purchases, as the labor market has regained about four-fifths of jobs lost at the start of the pandemic. After the Fed begins to reduce its asset purchases, we assess that the timing of the rate hike is likely to be in September 2022. In the rate hike bar, we see the recovery in employment rather than inflation as the threshold. Job growth through August was not enough to replace all the jobs lost in the pandemic overall, with millions of job openings still remaining. At this stage, we think that businesses and income segments that are more difficult to recover remain.
Here it seems that the work will take a little bit of Powell's tantrum of speech. There is a three-pronged match: First, Powell will continue to highlight the temporary of inflation and say that significant progress is still required for employment recovery (dovish; rate hike pricing does not get pushed forward). Latter; Rent, wage inflation, the energy crisis, and inflation spillover have been a bit of a concern and are weighted in the FOMC (hawkish; the Fed's September 2022 or 2023 probability is put one notch earlier and priced accordingly). Third; no new information is given (neutral). The fact that the Fed has reduced its asset purchases at this meeting does not normally mean that rate hikes are imminent. Futures funds are pricing in a 25 basis point increase in September 2022, reflecting the expectation that was pushed forward after the September meeting. In the 2013 model tapering application, the Fed finished its asset purchases in December 2014 and made its first rate hike in December 2015, after a one-year gap. However, inflation was not that high at that time, different inflation dynamics compared to that day feed the possibility of a zipped agenda.
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