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Stimulus Stoppage = Rising Rates

 

At the conclusion of their two-day policy meeting today, we are likely to see an acceleration to the wind-down of bond-buying stimulus program come from Federal Reserve officials. This would be a pretty clear indicator that we are likely to see interest-rate increases coming in the first half of this coming year. This move would end the stimulus package sooner than officials had planned for during their meeting last month. With the shift in strategy signaling Fed Chairman Jerome Powell’s strategy for the reserve has changed, now to focus on preventing higher inflation as a priority.

Faster Runoff

Mr. Powell and his colleagues have strongly signaled they might reduce the Fed’s purchases of Treasurys and mortgage-backed securities more quickly than they planned at their Nov. 2-3 meeting. They approved plans then to shrink the then-$120-billion-a-month bond purchases by $15 billion a month in November and December. Officials could further increase the pace of reducing purchases to $30 billion a month starting in January, which would have the conclusion of the stimulus program in March.

Upcoming Rate Projections

The Fed has stated that it would like to end asset purchases prior to lifting its short-term benchmark rate from zero. It has also been made clear by Mr. Powell, that the Fed employs a different test for determining interest rates than it does for ending asset purchases. With this being said, it is currently very difficult to get a decent snapshot of a potential upcoming rate.

Economic Projections

Officials will also update their economic projections because unemployment has fallen lower and inflation has climbed higher than they expected in September. The unemployment rate stood at 4.2% in November, a full percentage point lower than it was in August, the most recent figure available when officials completed their September projections.

A large focus of the new projections will be on where officials see annual inflation by the end of next year. In September, they projected core inflation, which excludes volatile food and energy categories, would fall to 2.3% at the end of next year, using the Fed’s preferred gauge. In October, core consumer prices were up 4.1% over the previous 12 months, leaving a lot of ground to be made up.

 
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