Insight - Investors looking for clarity


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.

INVESTORS looking for clear guidelines on when the Federal Reserve (Fed) will begin tapering its massive bond purchases were left waiting, with all eyes next on the annual Jackson Hole conference of central bankers in August.

The central bank has been buying US$120bil (RM507bil) in fixed income assets per month - US$80bil (RM338bil) in Treasuries and US$40bil (RM169bil) in mortgage-backed securities - to support the economy as it recovers from the impact of the coronavirus pandemic, and markets have been fixated on when the Fed will start tapering.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 Kimball.

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

Rick Rieder, chief investment officer of global fixed income at investment firm BlackRock, said he sees the Fed beginning to outline tapering at Jackson Hole, but will give more specificity at its September policy-setting meeting.

Powell said he is in the process of writing a speech for the event, but declined to give details.

“The Jackson Hole meeting may be another chance for the Fed to elaborate. Perhaps they would give us details on tapering and what that looks like,” said Jake Remley, senior portfolio manager at Income Research + Management.Some analysts such as Brian Rose, senior economist, Americas at UBS Global Wealth Management believes the Fed could announce tapering in December.

The market reaction to the Fed’s policy statement was muted.

Benchmark 10-year yields fell to 1.228%, after briefly rising to a session high of 1.278% immediately after the Fed statement.

The yield curve flattened, with the spread between two-year and 10-year notes narrowing to 102 basis points.

“It looks like a nothing burger,” said Joseph Lavorgna, Americas chief economist at Natixis.

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),” noted BlackRock’s Rieder. — Reuters

David Randall and Gertrude Chavez-Dreyfuss are journalists at Reuters. The views expressed here are their own.

Article type: metered
User Type: anonymous web
User Status:
Campaign ID: 46
Cxense type: free
User access status: 3
Join our Telegram channel to get our Evening Alerts and breaking news highlights

US , Fed , investors , clarity , tapering , Jerome Powell , economy , pandemic ,

   

Next In Business News

Indonesia’s halt to palm oil expansion set to expire soon
China defends tech crackdown in meeting with Wall Street chiefs
CPO futures likely to see technical correction next week
Evergrande says six execs redeemed investment products in advance
Infineon opens Austria plant early in chip capacity boost
Indonesia may reopen to tourists from some countries in October
Airbus reaches deal to restructure AirAsia jet order
Oil price falls as storm-hit US supply trickles back into market
World shares fall as markets await Fed meeting, taper timeline
Gadang’s subsidiary bags RM100mil deal

Stories You'll Enjoy


Vouchers