The Federal Reserve has signaled that it will eventually slow its asset purchases when the U.S. economy shows signs it no longer needs the help.
But the Fed has not offered any clues as to when it will specifically begin “tapering” its so-called quantitative easing program, which is currently absorbing about $80 billion in U.S Treasuries and about $40 billion in agency mortgage-backed securities each month.
The Federal Open Market Committee will meet Tuesday and Wednesday to check in on its monetary policy stance, which has been aggressively supportive of the economy through the pandemic and the recovery.
The central bank is expected to hold short-term interest rates at near-zero, shifting focus to the central bank’s ballooning balance sheet. But Fed watchers do not expect Chairman Jerome Powell to share much detail on a timeline to tapering.
“We might get a little bit of talk around taper,” RSM Chief Economist Joe Brusuelas told Yahoo Finance Monday. “But my sense is that the rising risks around the Delta variant, which is going to push down growth forecasts, provides the Fed with a little bit more room to delay the inevitable.”
Powell may say Wednesday afternoon that discussions on tapering ramped up, but Deutsche Bank Research's Matthew Luzzetti told Yahoo Finance Monday that he expects Powell "to stop short of sending a signal that a decision is imminent."
For the Fed, keeping its cards close to the chest will allow it to be flexible as a faster-than-expected economic recovery still faces the downside risk of another wave of COVID cases.
The central bank may want to wait for Thursday’s print on second quarter real GDP and next Friday’s July jobs report to assess the balance of those risks.
Timing of the taper
Still, the lack of guidance has Wall Street analysts scratching their heads over when a taper may begin.
Goldman Sachs expects the Fed to “first hint” about tapering at its August conference in Jackson Hole, Wyoming, or at its next scheduled FOMC meeting in September, followed by a formal announcement in December. ING Economics and JPMorgan both expect similar timelines.
Luzzetti at Deutsche Bank predicts the taper to be officially announced a bit earlier — at the Fed’s Nov. 3 meeting.
One wrinkle to tapering: How the Fed wants to execute a pullback in its aggressive monetary support.
Fed officials have fretted over the optics of snatching up billions in mortgage-backed securities in a hot housing market. In June, the median existing-home price for all housing types climbed to $363,300 — the highest level recorded since January 1999.
Powell has emphasized that those MBS purchases are designed to reinforce the Fed’s commitment to lower interest rates, not to directly pump up the housing industry. But some Fed officials ready to begin the taper talk are showing signs that they’d still prefer a steeper tapering of its MBS purchases compared to its U.S. Treasury purchases.
That could happen in a few ways. Credit Suisse, for example, suggests that the Fed could start tapering MBS “by later this year” with a taper in Treasuries following in “early 2022.”
Boston Fed President Eric Rosengren has another idea: decreasing the pace of purchases of both MBS and U.S. Treasuries in the same amounts.
“[T]hat would mean we'd stop the MBS program well before we stopped the Treasury program,” Rosengren told Yahoo Finance on June 25, adding that the Fed should “pay attention to the housing sector.”
The Fed’s decision is due at 2 p.m. ET on Wednesday, July 28.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.