Boston – The Federal Open Market Committee (FOMC) meets this Tuesday and Wednesday, and I expect three topics to be addressed.
I anticipate that the Fed will provide more details for its well-telegraphed tapering of quantitative easing (QE). At the September meeting, Fed Chair Jerome Powell indicated that tapering would begin in November, scaling back current purchases of $120 billion per month by $15 billion, or $10 billion of U.S. Treasurys and $5 billion of mortgage-backed securities (MBS). That implies an eight-month period of tapering to conclude in mid-2022.
Rise in short-term rates
The Fed will also likely address the significant moves in short-term rates in developed markets around the world — increases that have been very large relative to historical patterns. It appears that developed-market central banks have been trying to out-hawk each other, given that inflation is proving not to be just transitory but rather a little stickier, with higher prints than expected.
Increases at the short end have led to a significant flattening of yield curves globally. In the U.S., this has led to lower rates at the back end of the curve — still not lower than in other developed markets, but nevertheless a massive curve flattening.
Chair Powell's reappointment
Powell will inevitably be asked at Wednesday’s press conference whether he expects to be reappointed when his term is up in February, a date that is rapidly approaching. There has been much speculation that President Biden may choose Lael Brainard, current Fed governor and former U.S. Treasury undersecretary, as Powell’s successor. It’s a safe bet that we can expect Powell to dance uncomfortably around such inquiries.
Bottom line: The Fed has its plate full at this week’s meeting. Here’s hoping it will lend some clarity to the direction of policy in the wake of recent strong moves in inflation and short-term rates.