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Fed meeting may signal timing of end to pandemic monetary policy

The Federal Reserve may be close to ending its pandemic-era, ultra-loose monetary policy Clues about those plans are likely to emerge following this week's rate-setting Federal Open Market Committee meeting.

The latest views from Fed officials on the next interest rate hike are expected to be released at the close of the meeting Sept. 22, but economists do not expect plans to raise rates before 2023. Fed Chairman Jerome Powell will likely stress that any rate hike will not be based on the end of the central bank's monthly securities purchases, economists said.

Powell may also set the table for a November announcement of the central bank's plans to taper $120 billion in monthly securities purchases, again pointing to needed progress in the jobs market before tapering can begin.

"The Fed will likely reiterate that they are poised to taper before the end of the year but are still waiting to see how the economic recovery unfolds over the next couple of months," Edward Moya, a senior market analyst with OANDA, said in an interview.

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Powell will likely stress that the timing of taper continues to depend on progress toward the Fed's maximum employment goals. The U.S. added 235,000 jobs in August, well below expectations and the lowest monthly gains since January. Total nonfarm employment is still more than 5 million jobs below February 2020 levels.

"The spotlight will be on the upcoming jobs reports and high-frequency labor market indicators," Michelle Meyer, chief U.S. economist at Bank of America Securities, wrote in a Sept. 20 note.

If the Labor Department's jobs report for September includes an employment gain of roughly 750,000, tapering will likely be announced in November, according to Aneta Markowska, chief economist at Jefferies.

"Another miss could delay the decision until December, but we view the 750,000 hurdle as a relatively easy one to clear," Markowska wrote in a Sept. 16 note.

Most Fed-watching economists expect the tapering to begin in December or early 2022, but there is less agreement around how quickly the central bank will slow these purchases.

Goldman Sachs expects that the Fed will taper securities purchases by $10 billion in Treasurys and $5 billion in mortgage-backed securities each FOMC meeting, which are normally held eight times per year, David Mericle, Goldman's chief U.S. economist, wrote in a Sept. 18 note. Tapering would end in September 2022 at this pace.

Tackling rate hikes separately

While Powell is likely to offer few details this week on tapering, he is expected to try to separate the timing of the end of the Fed's monthly purchases with its next hike to the benchmark federal funds rate. An updated projection for rate hikes, on the so-called "dot plot," will be released after the meeting, along with expectations for inflation and GDP.

"Chair Powell will once again aim to delink the timing of tapering from rate lift-off," wrote Kathy Bostjancic, head U.S. financial market economist at Oxford Economics, in a Sept. 17 note. "However, this will be challenging, as the updated interest rate dot plot will likely feature earlier and faster tightening expectations among some FOMC members — highlighting the growing splintering within the FOMC."

The latest summary of economic projections is expected to show a "slightly more hawkish direction," with more members expecting earlier hikes, as they did in June, according to Michael O'Rourke, chief market strategist at JonesTrading.

"This Fed has deviated so far from traditional monetary policy, you can't trust any indication or forecast more than a couple of months out," O'Rourke said in an interview. "While they should indicate a higher likelihood of Fed Funds increases in 2023, the reality is it will be a moot point until tapering is underway."

Powell could keep a dovish tone as long as expectations do not show a rate hike in 2022, said Markowska, who expects three rate hikes in 2023 and three more in 2024.

Meanwhile, Meyer with Bank of America expects two hikes in 2023 and three more in 2024.