Over the past week, Fed officials have gone out of their way to socialize the idea of an accelerated taper.
Recent commentary from Christopher Waller, Richard Clarida, Raphael Bostic and, finally, Mary Daly, all suggested officials see more than a little utility in winding down pandemic QE faster than the $15 billion per month pace announced at the November meeting.
“A faster taper would certainly give us more optionality as we move into 2022 and see sort of where the data takes us,” Bostic told Bloomberg’s Kathleen Hays earlier this week. “I definitely think it is appropriate for us to be talking about the pace of tapering and being open to a faster one.”
“If things continue to do what they’ve been doing, then I would completely support an accelerated pace of tapering,” Daly said Wednesday, during an interview with Yahoo Finance. “I certainly see a case to be made for speeding it up.”
The writing is on the wall. Barring a total debacle on the November NFP headline, the debate at the December FOMC meeting will be around whether to announce a faster taper. In a note out Thursday, Goldman said the Fed will likely double the pace at next month’s meeting.
“We now expect the Fed to announce at its December meeting that it is doubling the pace of tapering to $30 billion per month starting in January,” David Mericle, Jan Hatzius and Ronnie Walker wrote. “In that scenario, the FOMC would announce the final two tapers at its January meeting and implement the final taper in mid-March, several days before the March FOMC meeting.” The figure (below) illustrates a hypothetical accelerated taper.
Of course, part of the rationale for accelerating the taper pace is to get “clear of it,” so to speak, so that rates can be hiked should inflation refuse to abate. Some officials have mentioned that explicitly.
Although Jerome Powell has stuck assiduously to talking points aimed at de-linking the taper timeline from liftoff, there is a link between the two. Unless you intend to tighten with both fists, you have to complete the taper before you hike rates. So, the sooner the taper is complete, the sooner you can hike.
Goldman now sees three hikes next year. “While this faster pace of tapering would allow the FOMC to consider a rate hike as early as its March 15-16 meeting, our best guess is that it will wait until the June meeting,” the bank said, adding that they now see the Fed hiking in June, September and December. Previously, Goldman expected just two hikes in 2022 (figure below).
That’s generally in line with market expectations and I’d note that Wednesday’s data, particularly the combination of robust personal income and spending figures and elevated PCE prices, argue for a faster stimulus unwind.
Deutsche Bank agrees. “Taking into account this broad-based messaging from officials, and with our baseline expectations anticipating another solid jobs report next week and an elevated inflation print for the November CPI data, we now expect that the Fed will accelerate the pace of tapering at the December meeting,” the bank’s Matt Luzzetti said, in a Wednesday note. “As long as the data come in close to our expectations, our base case is that the Fed will announce a doubling of the monthly reduction, bringing the drawdown to $20 billion and $10 billion per month for Treasurys and MBS, respectively.”
The bank also brought forward their liftoff call to June from July. “Beyond liftoff, we continue to anticipate that the Fed will raise rates at a quarterly pace, and pause in Q3 2023 to begin passive rundown of the balance sheet,” Luzzetti went on to say, noting that the bank’s projections are “consistent with three hikes in 2022, three in 2023, and two in 2024.”
As for whether risk assets can handle a fairly rapid wind down of asset purchases followed by a trio of rate hikes in a relatively compressed time frame, you’ll have to draw your own conclusions.
“There’s a debate to be had about whether [waiting so long] to hike rates forces asset markets to do a central bank’s job, fomenting excess which then only needs a tiny tightening to topple the economic expansion,” SocGen’s Kit Juckes said Thursday. “I know plenty of economists and strategists who think that’s nonsense, though quite a few of them were also shocked by how fragile the global economy was in 2008.”
As to Juckes warning and your “Good News is bad news” What effect with the Dollar?
Many economist think what they say is written in stone when it is really just written on the back of a napkin.
No one wants the market to have a significant sell off, let alone a crash.
So it either
1) will not have too significant of a sell off due to proactive “fiscal/monetary largess”
or
2) if it does have too significant of a sell off- quickly be given monetary and/or fiscal stimulus.
Hard to imagine I would ever significantly move from equities to bonds during the next decade. But one thing I have learned is this: never say never.
Have s wonderful Thanksgiving (whatever that means).
Zeroing out purchases of MBSes sooner rather than later should help to cool the overheated housing market and keep a lid on inflation expectations going forward..
H-Man, the malestrom of inflation is forcing the Fed to confront crossing the Rubicon. Methinks the crossing will be soon.