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FOMC preview: Is the Fed thinking about tapering?

·Anchor/Reporter
·3-min read
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Federal Reserve Chairman Jerome Powell has said that the central bank is “not even thinking about” pulling its aggressive stimulus.

But with the U.S. economy showing positive signs of bouncing back through the vaccine rollout, when might the Fed take the first step of paring back on its asset purchases?

Powell could provide some clues at the conclusion of the Federal Open Market Committee’s meeting Wednesday at 2 p.m. ET, but Fed watchers are expecting a broadly “uneventful” afternoon.

“The post-meeting statement is likely to be little changed, other than to note the firming of momentum in activity and employment and the pick-up in headline inflation,” JPMorgan analyst Michael Feroli wrote in a note Friday.

With the central bank expected to hold pat on interest rates at near-zero, the focus of financial markets remains fixated on the Fed’s $120 billion-a-month pace of U.S. Treasury and agency mortgage-backed securities purchases.

Under the so-called quantitative easing program, the Fed has pumped money into the banking system with no signs of tapering the program yet.

The FOMC has officially said it would not reduce that pace of purchases until it sees “substantial further progress” in the economic recovery.

“Until we give a signal, you can assume we’re not there yet. And as we approach it, well in advance, we will give a signal that we’re on a path to possibly achieve that — to consider tapering,” Powell said in the Fed’s last press conference six weeks ago.

US Federal Reserve Chairman Jerome Powell listens to a question during a House Financial Services Committee hearing on
US Federal Reserve Chairman Jerome Powell listens to a question during a House Financial Services Committee hearing on "Oversight of the Treasury Department's and Federal Reserve's Pandemic Response" in the Rayburn House Office Building in Washington, DC, on December 2, 2020. (Photo by Greg Nash / POOL / AFP) (Photo by GREG NASH/POOL/AFP via Getty Images)

Wells Fargo Senior Macro Strategist Zach Griffiths told Yahoo Finance Tuesday that he expects the Fed to announce a taper "by the end of this year" with the actual tapering beginning in early 2022.

Evercore ISI analyst Krishna Guha said he expects further clues on tapering around June but no “clear signal” from the Fed before August.

“We think the FOMC judges that it is still too early to be thinking about tapering, and we expect no even incremental signal on policy at this meeting,” Guha wrote in a note Monday.

Brighter outlook

Although little new details are expected on Fed policy actions, the FOMC could provide an update on how it is viewing the economic recovery.

Data points received since the Fed’s last decision on March 17 have pointed at a sharp rebound in the U.S. economic recovery, as millions of Americans continue to get vaccinated.

Initial jobless claims dropped to pandemic-era lows as the re-openings pulled the unemployed back to work, U.S. consumer confidence hit a 14-month high, and March retail sales showed the best monthly rise since May 2020.

For Fed policymakers, the most important data point was the March jobs report showing a near-million job gains. With employment levels still about 8.4 million jobs short of where they were pre-pandemic, Powell said he would like to “see a string of months like that” to show progress towards the central bank’s goals.

The next jobs report, covering the month of April, is due from the Bureau of Labor Statistics on May 7.

The Fed will not have an updated economic forecast to publish alongside tomorrow’s policy statement, but Powell may offer increased optimism in his press conference.

The statement will be released at 2 p.m. ET on Wednesday with the press conference to follow at 2:30 p.m. ET.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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