Fed to Update US Economic Growth Forecast
The Federal Reserve is set to improve its forecast for the US economy on Wednesday, indicating an acceleration in the US recovery from the pandemic that will test the central bank’s willingness to maintain ultra-loose monetary policy in coming years.
Following a two-day Federal Open Market Committee meeting, economists expect the central bank to make a significant upgrade from its December forecast that the United States would rise by 4, 2% this year, with core inflation of 1.8%. and the unemployment rate fell to 5 percent.
Many private sector economists have already revised their forecasts upwards thanks to President Joe Biden’s $ 1.9 billion stimulus and faster vaccine roll-out, with more than 2.4 million Americans receiving a blow every day.
While the Fed is unlikely to make big policy changes on Wednesday, more optimistic projections should intensify investor debate on when the central bank will begin to withdraw support for the economy.
The Fed meeting comes at a delicate time for the $ 21 billion US government debt market. Treasury bill yields, which rise with falling prices, have soared higher in recent weeks during episodes of frenzied trading as investors revised their growth and inflation forecasts upward while pushing forward the expected timing of the Fed’s first interest rate hike.
In December, the median estimate by Fed officials did not signal an interest rate hike until at least 2024. The central bank said inflation is expected to reach 2% and be on track to exceed that target all the time. by reaching full employment. make such a move.
However, Fed watchers are now also divided on whether U.S. central bankers will signal that the first rate hike could come as early as 2023.
“With these types of upgrades, it’s more likely than not that the median will show an increase [in 2023], although it’s actually quite controversial, ”said Jan Hatzius, chief economist at Goldman Sachs. “If you look at some of the forecasters’ surveys, there are different views on this,” he added.
So far, Jay Powell, the chairman of the Fed, has pointed out that the US central bank is far from meeting its US recovery targets, suggesting little concern among senior central bank officials over the rising debt yields or inflation in the context of an improving economy. .
But Powell’s apparent willingness to tolerate the sharp rise in yields so far has rattled investors, helping to push 10-year yields even higher. The benchmark 10-year bond is now trading around 1.6%, after hovering at 0.9% at the start of the year.
Powell revealed in his last public appearance ahead of Wednesday’s meeting that “disorderly” moves resulting in tighter financial conditions would affect the central bank. But so far, the increase in yields is seen by many Fed officials as a natural product of the improved outlook. While this caught their attention, it was not extreme enough to jeopardize the recovery, U.S. central bank officials suggested.
Investors reduced their holdings of Treasury futures as growth and inflation expectations edged up, according to data from the Commodity Futures Trading Commission.
And some fund managers have positioned themselves for a further increase in returns. Asset managers are now net short on 10-year and ultra-10-year Treasury futures, a sign that they believe bond prices could fall further.
Scott Thiel, chief fixed income strategist at BlackRock, said, “The market is testing when the Fed says enough is enough.”
David Norris, Head of US Credit at TwentyFour Asset Management, said: “Given the pace of recent developments, it’s easy to see why some market players are getting nervous. . . We would certainly expect the Fed to act if it starts to see evidence of a significant tightening. “
Policy makers predict that public debt liquidation will accelerate in the absence of a change in the Fed’s stance. Goldman Sachs, Societe Generale and Credit Suisse recently updated their forecasts and now forecast 10-year Treasury yields to hit 2% by the end of the year.
Additional reporting by Eric Platt in New York