Original title: everyone is concerned about whether Powell's speech on Friday will release the Taper signal! Why is there a greater risk if it is delayed?
Source: FX168
On Thursday and Friday, the annual meeting of the central bank of Jackson Hole, which has attracted the attention of global financial markets, finally arrived, and Federal Reserve Chairman Powell will deliver a keynote speech on Friday local time, in which investors hope to find any "clues" about cutting back on bond purchases.
The Fed currently buys $80 billion of Treasuries and $40 billion of mortgage-backed securities a month, and the bank is expected to end its purchases of these assets before raising interest rates.
The Fed has said it will keep its bond purchases unchanged until the economy makes substantial further progress towards full employment and price stability.
After the last recession, it took the Fed 10 months to end its $85 billion-a-month bond-buying program.
It was announced in December 2013 that it would end bond purchases, which began the following month, and the Fed cut its bond purchases by $10 billion at each policy meeting. In October 2014, the Fed ended all bond purchases and raised interest rates for the first time in seven years in December 2015.
Goldman Sachs GroupChina said in a recent report that the probability that the Fed announced in November that it would begin to scale back its bond purchases increased and predicted that the central bank might choose to reduce its purchases by $15 billion at each meeting.
Goldman Sachs Group predicts that there is a 45 per cent chance that the Fed will begin to scale back its bond-buying programme in November, up from a previous estimate of 25 per cent, and reduce the probability of December from 55 per cent to 35 per cent.
Bloomberg also pointed out in the report that these days, all the discussions in the financial markets have focused on when the Fed will start to reduce the size of its bond purchases, but for all markets, such as equity and debt exchange, what is more important is when the bond purchases will end.
Investors have made few major moves and are eagerly waiting for the Jackson Hole seminar to begin on Thursday, and Federal Reserve Chairman Powell may provide clues on when and how the Fed will scale back its bond purchases on Friday. This will help determine the timetable for the Fed to raise interest rates.
The withdrawal of stimulus can be described as a boost, as a flood of liquidity in the financial system has pushed US stocks to record highs and Treasury yields remain just above a six-month low.
In cases where Delta poses a new risk, reducing the size too quickly could derail the economic recovery and act too slowly or exacerbate inflationary pressures brought about by economic restart.
Tom Essaye, a former Merrill Lynch trader, said, "the key point for the market is the speed with which the Fed withdraws from easing, as it determines how long it will take for the Fed to stop buying bonds completely, and then it will be the first time it will raise interest rates."
Essaye believes the Fed is most likely to start downsizing in December until it is fully completed by the end of 2022, which he says will help drive further gains in stocks and commodities and push 10-year yields towards 2 per cent.
Yields on 10-year Treasuries have fallen steadily since March and are now around 1.3 per cent, not far from record lows on fears that the US epidemic could dampen the economic recovery.
The gap between long-term and short-term Treasury yields has narrowed since hitting a more than five-year high in March, suggesting speculation that the Fed will begin to withdraw its stimulus measures. The Bloomberg dollar spot index showed that the prospect of higher interest rates boosted the dollar, rising as high as this month to its highest level since November.
Morgan StanleyThe 10-year Treasury yield is expected to close at 1.8% by the end of the year, and the Fed is expected to start reducing its size in January and end in October. It also expects the Fed to raise interest rates for the first time in the second quarter of 2023.
Steven Barrow, head of monetary strategy at Standard Bank Gmur10, said the risk would be greater if the Fed delayed Taper than it did earlier. Delaying the Taper could force the Fed to raise interest rates just months after ending its bond purchases, a move that could disrupt financial markets and push safe-haven funds into assets such as the yen and the Swiss franc.
"it's dangerous for the Fed to do this because it needs to start talking about a possible rate hike from the middle of next year," Barrow said. And we know that it is not impossible for the Fed to raise interest rates sometime around the end of next year. So I am more concerned about the end of the Fed's reduction than the starting point. "