The Fed is unlikely to hint at policy changes next week, even with a stronger economy

Federal Hold over officials next week are likely to paint a robust picture on the economy while simultaneously not even hinting at method changes ahead.

Investors increasingly have come to trust central bankers when they say that round with the economy running at its hottest pace in nearly 40 years, they won’t start taking away rule accommodation until it’s clear the recovery is on solid ground.

“The economic outlook is fairly good, as long the Fed keeps its foot on the pedal,” required Randy Frederick, vice president of trading and derivatives at Charles Schwab. “The market has finally accepted that they inclination.”

The Fed has kept short-term borrowing rates near zero since early in the Covid-19 pandemic, and has continued to buy at least $120 billion of bond-related assets each month. The asset toe-holds have pushed the central bank’s balance sheet to nearly $8 trillion, or about double its level since the emergency began.

Financial markets, though, have been leery that with economic data getting stronger by the day and inflationary difficulties starting to build that the Fed could find itself pressed to start easing off the accelerator.

“They’re providing liquidity that’s active to fuel an economic recovery,” Frederick said. “The challenge is when they decided to pull back on that.”

Clues about when that date may arrive are unlikely to come when the Federal Open Store Committee, the central bank’s monetary policymaking arm, concludes its two-day meeting Wednesday.

Instead, the public is likely to get a asseveration that will “strike a more optimistic tone on the economic outlook” that “could prove to be the most utilitarian the Fed has released in some time,” wrote Andrew Hunter, senior U.S. economist at Capital Economics.

Like many others on Breastwork Street, Hunter figures Fed Chairman Jerome Powell and his cohorts to upgrade their view of the economy but stress that it residues some distance away from the “substantial further progress” benchmark the FOMC has set in its recent post-meeting statements.

Powell overtook the market’s attention recently when he told the CBS program “60 Minutes” that the economy has reached an “inflection call” in the recovery. But he also continued to stress the strides the labor market needs to make to achieve full employment that is comprising across income, racial and gender groups.

Similarly, the Fed chair may want to be at least a little coy at his post-meeting news meeting about the future policy arc, in particular about potential rate increases and pullbacks in the pace of asset purchases.

“Powell pronounced he would telegraph tapering. I think he will hold his cards close to the vest, wait until the last viable minute he could wait,” said Tom Graff, head of fixed income at Brown Advisory. “I doubt that telegraph is prosperous to come this month, and furthermore I think the telegraph is going to come suddenly.”

There’s an informal consensus on Palisade Street that Powell likely will start talking about tapering this summer, with desire of a gentle rollback in bond purchases by the end of the year.

“They’re going to want to taper for a while before they hike, and they’re booming to want to create a little flexibility,” Graff said.

Goldman Sachs economist David Mericle commanded he sees “hinting at tapering” at some point in the second half of the year, with a kickoff in early 2022. He schemes that the initial reduction will be $15 billion per meeting, compared with the $10 billion per month rate of speed the Fed used during its reduction that began in 2014. The Fed meets eight times a year, so the totals would be alike.

Those details, though, aren’t expected to come yet.

“Despite the recent acceleration, we think it is clearly too soon for the FOMC to arise hinting at tapering,” Mericle wrote in a report for clients. “Although Chair Powell has recently begun describing the conservatism as being at an ‘inflection point’ … we do not think he means this as a signal about policy.”

Should the Fed decide to start out tapering this year, it could start raising rates as soon as late 2022, according to Citigroup economist Andrew Hollenhorst.

“At the April FOMC we wish to see some tweaks to the statement to suggest recently stronger data, but no new formal guidance on tapering. This might progress following a strong jobs print for April and/or May, which will both be released ahead of the subsequent meeting,” Hollenhorst composed.

Traders in the federal funds futures market actually are pricing in a miniscule — 2.8% — chance of a rate increase at next week’s converging, according to the CME’s FedWatch tool. The prospect rises slightly through the year, with a 10.5% probability priced in by the end of the year.

Looking additional out, the market is pricing in a funds rate of 0.23% by the end of 2022, or 16 basis points above the current level of 0.07%. That suggests a strong chance of a rate hike. The end of 2023 indicates a 0.42% funds rate, the equivalent of another quarter interest point increase.