Since the announcement by Joe Biden at the start of the week of Jerome Powell’s reappointment for a new four-year term at the head of the Fed, interest rates have risen sharply and the markets are anticipating a start to rise. Fed key rates from mid-2022, or even earlier in the face of soaring inflation.
Several Fed officials have spoken out in recent days in favor of an acceleration of “tapering” (the reduction of the Fed’s asset purchase program) considered as a prerequisite for the rate hike. And the publication of the Fed Minutes on Wednesday evening confirmed that some officials had spoken in favor of a faster “tapering” from the meeting of November 2 and 3, at the end of which the Fed has announced its intention to reduce its purchases.
The report also shows that the members of the Fed are ready to accelerate the “tapering” and to raise the key rates “faster than the markets presently forecast” if inflation continues to soar above the central bank’s targets. .
“Prevent inflation from taking root for the long term”
Immediately appointed, “Jay” Powell and his future vice-president Lael Brainard both insisted on Monday on their determination to control inflation, which in October reached 6.2% over one year, well above the target. long-term 2% of the Fed. On Wednesday, we learned that the ‘core PCE’ price index, the Fed’s preferred measure of inflation, rose 4.1% year-on-year, figures in line with market expectations, but which reflect a strong acceleration compared to September (+ 3.7%).
Jerome Powell said that “we are using our tools to support the economy and a strong labor market, but also to prevent inflation from taking hold.” Several other members of the Fed have shown themselves to be less “dove” than before in the face of a rise in prices which seems decidedly less transitory than initially expected.
A “tapering” completed at the end of the 1st trimester?
Thus, Raphael Bostic, the boss of the Atlanta Fed, indicated on Tuesday that the Fed may need to accelerate the ‘tapering’, to complete it at the end of the 1st quarter (instead of mid-2022) , in order to give itself more flexibility regarding the subsequent rate hike.
San Francisco Fed President Mary Daly also said on Wednesday that she was open to an acceleration of “tapering” if inflation remained high and job growth remained strong. “If things continue to do what they have been doing, then I would fully support an acceleration in the pace of the gradual reduction in asset purchases,” she said in an interview with Yahoo Finance. Last week, the Fed’s vice-chairman Richard Clarida (who will be replaced by Lael Brainard at the end of January) also suggested that the Fed consider a faster rate of “tapering” at its next meeting on December 14 and 15.
On Wednesday evening, in the US bond markets, the yield on the 2-year T-Bond climbed 3 basis points to 0.64% (from 0.51% on Friday before the announcement of Powell’s second term), while the American 10-year rate yielded 1 basis point to 1.65% (against 1.55% on Friday, and 0.90% at the end of 2020).
At the end of its meeting on November 2 and 3, the Fed announced the start of the reduction in its asset purchase program from mid-November. These massive purchases of $ 120 billion per month will be reduced by $ 15 billion per month, which would imply 8 months to return to zero. The Fed warned, however, that it could adapt the pace of these purchases, upwards or downwards, depending on the economic situation. Jerome Powell had however displayed a cautious stance, still deeming inflation “transient” and promising patience before raising rates.
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