Fed to announce slowdown in quantitative easing in August or September amid rising inflation fears: Reuters poll

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By Indradip Ghosh

BENGALURU (Reuters) – The Federal Reserve is expected to announce a strategy to cut back on its massive bond buying program in August or September, but will not start cutting monthly purchases until early next year, poll shows Reuters to economists.

A significant number of Fed watchers also said the central bank would wait until later in the year before announcing a cut, now the main focus of markets worried about rising inflation as the end of the pandemic in the United States is in sight.

Booming demand with the reopening of the US economy is expected to continue and push consumer prices up this year, with Reuters poll from June 4-10 of more than 100 economists showing improved growth forecasts and inflation.

Almost 60% of economists, or 29 out of 50, who answered a supplemental question said a much-anticipated central bank cut announcement would come in next quarter, despite an uneven labor market recovery in recent months.

That included 13 predicting he would come to the Jackson Hole Symposium in August, an annual conference where central bankers often let go of important policy advice.

The other 21 plan to announce a reduction in the quantitative easing (QE) program after the third quarter.

“We expect to hear clear clues at the Jackson Hole conference that the Fed is currently discussing the merits of cutting QE and this will be further developed at the September FOMC four weeks later,” said James Knightley. , chief international economist at ING. .

“At this point, we think the Fed will indicate that the market should prepare for an official QE cut announcement with the way forward outlined at the December FOMC.”

Reuters poll on the outlook for US Federal Reserve monetary policy: https://fingfx.thomsonreuters.com/gfx/polling/xklpyajkxpg/US%20eq%20June.PNG

Almost 60% of economists, or 26 out of 45, said the cuts would begin in the first quarter of next year.

Among those who ventured to guess by how much monthly bond purchases would be reduced, they gave a median forecast of $ 20 billion, split evenly between Treasuries and Mortgage Backed Securities (MBS). Individual responses reached $ 40 billion for treasury bills and $ 20 billion for MBS.

The Fed currently buys $ 80 billion per month in treasury bills and $ 40 billion in MBS.

Driven by massive government spending and a rapid inoculation campaign, the US economy is expected to grow at a seasonally adjusted annualized rate of 10.0%, 7.0% and 5.0% in the current quarter, next and fourth, respectively.

This is compared to the 9.5%, 6.7% and 4.7%, respectively, forecast in the previous survey.

“The United States is on track to have recouped all of its lost production in the current quarter and end the year with a bigger economy than if there had been no pandemic and growth s ‘was just continued in its 2014-19 trend, “added ING’s Knightley.

The US unemployment rate is expected to decline gradually until the end of next year, averaging over 5% this year and over 4% in 2022. It is still above its pre-crisis level 3.5%.

Reuters poll chart on US inflation, economic growth and unemployment outlook: https://fingfx.thomsonreuters.com/gfx/polling/xegpbrbkrpq/DSCHART%20June%20U.S..PNG

The Fed’s favorite inflation indicator, the basic personal consumption expenditure price index, jumped in April to 3.1%, its highest annual rate since July 1992. It is expected to average 2%. , 5% this year and 2.2% next year, according to the poll, above the central bank’s 2% target.

This compared to the 2.1% forecast for the two years last month.

“While much of what we are seeing now is indeed transitory, structural changes are taking place in the global economy and national fiscal policy that could lead to more sustained high inflation,” said Philip Marey, strategist senior American at Rabobank.

More than 60% of economists, or 23 of 38, said higher inflation was the biggest risk to the U.S. economy, compared with just six penciled in high unemployment. And about two-thirds said they were concerned about rising US inflation.

“You get the message, in large print: The aggressive deployment of stimulus and vaccines is bouncing US demand much faster than supply,” said Sal Guatieri, senior economist at BMO Capital Markets.

“It creates a lot of nasty side effects, like inflation … just a few quarters after the economy collapses instead of the usual several years for imbalances to appear after a recession. The writing is on the wall: the Fed’s temporary inflation mantra looks increasingly dated this week. “

(Reports and polls by Indradip Ghosh and Shrutee Sarkar; edited by Rahul Karunakar and Andrea Ricci)

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