The Federal Reserve is not expected to take any policy actions after its two-day meeting this week, but it is likely to signal that it is thinking about them. Stock futures were flat on Wednesday morning as investors awaited the 2 p.m. ET Fed statement and Chairman Jerome Powell’s news conference 30 minutes later. Some economists expect the Fed to mention a coming tapering of its bond-buying program and give preliminary guidance on the discussion but not fully commit to tapering yet. The Fed will also release new economic forecasts, which it does quarterly. There’s a chance it could pencil in an initial rate hike in 2023. In its previous forecast, there was no consensus for a rate hike among Fed officials though 2023.
That discussion could begin this week, but only on a preliminary level, some economists say. The real details of the tapering of its $120 billion monthly purchases are expected to come later this year. Many economists expect the official discussion to be in late August, when the Fed meets in Jackson Hole, Wyoming, for its annual symposium. The Fed could then begin unwinding its bond buying at the end of this year or beginning of next, they say.
Tapering the bond program is important because the beginning of the end of its so-called quantitative easing signals the Fed would be on the path to eventually tighten policy — or raise interest rates. The Fed began purchasing Treasurys and mortgage securities last year as a way to provide liquidity when the Covid pandemic shut the economy down. Once the Fed starts reducing the purchases, it could take months to be completed. When it reaches zero, the door would then be open for the Fed to raise interest rates. The Fed’s easy policies have been credited with fueling the stock market’s rally to repeated new highs and creating a robust environment for the housing market.
The Fed is expected to boost its inflation forecast for this year after hotter-than-expected readings this month and last month. The consumer price index for May was up 5%. Economists are focused on the 2023 forecast, since higher inflation in the future could prompt the Fed to change its interest rate forecast as well.