With chances that the Federal Reserve taper could start earlier than later, analysts are bringing their timeline estimates for the quantitative easing (QE) taper timeline forward.
See: Fed taper could start 'soon' and end around mid-2022: Powell
Bank of Singapore’s (BoS) chief economist Mansoor Mohi-uddin says he expects the Fed to announce tapering at its November meeting, as the Federal Open Market Committee (FOMC) “made it clear” that it will do so “if progress continues broadly as expected”.
As such, “only a weak payrolls report on Oct 8 may stop tapering [from] being announced in November now,” says the economist.
However, Mohi-uddin also expects the Fed to pull back on bond purchases at a pace of US$15 billion ($20.3 billion) every month “rather than at every FOMC meeting”.
The prediction is also derived from Fed chairman Jerome Powell’s statement that “so long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate”.
In a report dated Sept 23, Mohi-uddin adds that he expects the Fed to start increasing its fed funds interest rate in 2023 rather than in 2024.
To this end, the faster pace of tapering and the end of QE in mid-2022, means that the Fed is likely to announce two basis points (bps) hikes during the 2H2023 and three to four further increases in 2024.
“The FOMC would thus be hiking rates roughly once a quarter similar to its last tightening cycle in 2017-2018. This would support the USD in future,” writes Mohi-uddin.
“But with gradual rate rises still two years away, and the Fed’s leadership staying dovish despite inflation over 2%, the FOMC’s stance will keep benefiting risk assets. Treasury yields are set to steepen once tapering starts but we still see 10-year yields only rising to 1.90% over the next 12 months,” he adds.
The USD is likely to appreciate further, following Powell’s announcement on Sept 22, says DBS Group Research senior forex strategist Phillip Wee.
The appreciation is also dependent on two important events before the FOMC meeting in November.
“First, there must not be another big miss in US nonfarm payrolls scheduled for release on Oct 8,” writes Wee.
“Consensus expects nonfarm payrolls (NFP) to increase to 513,000 in September after the fall to 235,000 (vs 735,000 expected) in August. In this regard, another increase in the initial jobless claims today will not be welcome,” he adds.
Second, Congress must approve a bill to suspend the federal debt limit.
House Democrats, on Sept 22, pushed through a bill to fund the US government through Dec 3 and suspend the borrowing limit until end-2022, while Republicans vowed the block the bill in the Senate.
However, the Treasury Department has already warned that the stopgap bill has to be passed by Sept 30 to keep US government offices open in the new FY that starts on Oct 1, notes Wee.
UOB’s senior economist Alvin Liew says the QE tapering could well happen by November 2021. The first rate hike could also take place at end-2022.
“Post-Sep FOMC, the hawkish tilt in Powell’s commentary and the updated Dotplot, and the updated economic projections, all indicate there is a shift forward to the Fed policy timeline. As such, we are revising the QE taper timeline forward to the upcoming November 2021 FOMC (from December FOMC previously) and a shorter completion time-frame of around 8 months by July 2022 (from 1.5 years previously),” he writes.
Liew has also brought forward his estimate for the first Fed funds target rate hike to December 2022 from June 2023 previously.
“We are projecting only one 25 bps rate hike to 0.25-0.50% in 2022. In 2023, we are projecting two more 25 bps rate hikes,” he says, noting that the taper timeframe in 2013 was 10 months from December 2013 to October 2014.
The first rate hike following that was more than a year after tapering was completed in December 2015.
To DBS Group Research senior rates strategist Eugene Leow, the FOMC gave the strongest hint yet, that taper is imminent.
“This has been largely communicated over the past few months and it is now generally accepted that the taper would likely be announced (and start) in November,” writes Leow.
In a note dated Sept 23, Leow notes that many of the Fed’s revised quarterly economic projections stood in line with DBS’s own numbers.
GDP growth for 2021 was lowered to 5.9% from 7% previously, while GDP growth for 2022 was lifted to 3.8% from 3.3% before.
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Core personal consumption expenditures (PCE) inflation is now higher for 2021 and 2022 at 3.7% (from 3%) and 2.3% (from 2.1%).
“The upshot is that the Fed is taking a more sanguine outlook, expecting slow growth and high inflation to both be transitory. That said, the Dotplot is clearly more hawkish with members now evenly split for a 2022 liftoff. By end-2024, the median Dotplot now shows a Fed funds rate of 1.75%,” says Leow.
In terms of strategy, paying three- to five-year rates are a “cleaner bet” on the normalisation of the Fed.
“This Fed hike pricing discount should be reduced as taper proceeds and the market focus on rate hikes. Three-year and five-year yields at 0.45% and 0.80% should be seen as pay opportunities,” he notes.
“We are neutral on the 10-year tenor, with the 1.20-1.38% range still holding. We think a tactical pay at 1.25% makes sense. We still see fair value close to 1.6%,” he adds.
To Leow, the taper clarity would encourage carry plays in Asia in time.
“While USD did strengthen and there are still concerns on Evergrande, we note that EM / Asia governments generally look undervalued and stick to our positive view for Indo government bonds (IndoGB).”