As Fed tiptoes around tapering, investors look to August meeting for clarity

NEW YORK (REUTERS) – Investors looking for clear guidelines on when the US Federal Reserve will begin tapering its massive bond purchases were left waiting on Wednesday (July 28), with all eyes next on the annual Jackson Hole conference of central bankers in August.

The central bank has been buying US$120 billion (S$162.8 billion) in fixed income assets per month – US$80 billion in Treasuries and US$40 billion in mortgage-backed securities – to support the US economy as it recovers from the impact of the coronavirus pandemic, and markets have been fixated on when the Fed will start tapering.

Mr Powell said in June that there had been initial discussions about when to pull back.

The Fed, which concluded its two day Federal Open Market Committee policy meeting on Wednesday, appeared to make progress in that discussion, though there was no clear timetable.

“The Fed opened the door to tapering but they didn’t pin themselves into it,” said Scott Kimball, co-head of US fixed income at BMO Global Asset Management.

As a result, the market will likely now focus heavily on whether the central bank will give further indications at the Jackson Hole conference on Aug 26-28 of its policy to allow inflation run hotter than normal to make up for periods of low inflation, said Mr Kimball.

“The Fed owes us an update on their thinking” given the economic recovery in the year since, Mr Kimball said.

Some analysts such as Brian Rose, senior economist, Americas at UBS Global Wealth Management believes the Fed could announce tapering in December.

Fed Fund futures, a widely used security for hedging short-term interest rate risk, have fully priced a 25-basis point tightening by the first quarter of 2023, unchanged from prior to the release of the Fed statement.

“We didn’t expect this policy decision to cause too many waves and that’s exactly what it’s looking like,” said Ryan Detrick, senior market strategist at LPL Financial. “The Fed is seeing improvement in the economy, but the economy still needs assistance they’re going to leave rates where they are.”

Still, some see risks ahead as the Fed prepares eventually to start raising rates.

“For me, I don’t think the issue is tapering, it is liftoff, and that’s where the risk is,” said Marcus Moore, assistant portfolio manager, Zeo Capital Advisors, in the scenario where growth is strong. “As I think about my portfolio, the risk is that liftoff happens much sooner than the market is anticipating.”

Some, however, said the Fed needs to be more direct in communicating its plans to pull back its emergency-level support of financial markets.

“Tapering in a deliberate manner … is now so insignificant to the size of financial markets that not outlining a plan is more confusing than just putting one out there for markets to react to (or not),” said Rick Rieder, chief investment officer of global fixed income at investment firm BlackRock.

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