We believe the Fed will announce the start of its bond buying at its next meeting as we reconsider the path for Fed policy tightening By Thomas Costerg, Pictet Wealth Management.

We expect that the Federal Reserve will announce a reduction in its USD 120bn-per-month bond-buying programme at the conclusion of its next policy meeting on 3 November. We believe that the Fed will start with a first cut of USD 15bn per month, likely split between Treasury debt (USD 10 bn) and mortgage-backed securities (USD 5 bn).

We also believe quantitative easing will be scheduled to end completely at the end of Q2 22. There is growing market pressure on the Fed to remove monetary accommodation faster. Fed Chairman Jay Powell, who is seeking to be appointed for another four-year term, will likely renew his calls for patience before hiking interest rates. But conspicuously absent from Powell’s discourse on 3 November will very probably be the reference to inflation as “transitory”. However, he will likely stress his belief that inflation will slow down in the second half of 2022, echoing similar recent comments from Treasury Secretary Janet Yellen.

As we prepare our scenarios for 2022, the persistence of supply-chain bottlenecks as well as upward pressure on commodity prices combined with rising inflation expectations could lead us to reconsider the path for Fed policy tightening. However, we remain of the view that the Fed will seek to keep its interest rates below the rate of inflation in the long run, as it remains implicitly focused on the high level of debt in the US economy, and is more worried about the risk of a (debt-driven) recession than rising inflation.

While our central view is that interest rates could remain low for some time, Fed policymakers could experience a ‘Volcker moment’ and judge that sharp and sudden rate hikes (well above the rate of inflation) are needed to keep the Fed’s credibility and reputation intact.

But the risk of such a turn in Fed policy is remote, not least because it would require a broad rejection by society at large of the ‘soft money’ regime in place since the early 1990s. We still think ‘soft money’ has staying power—notwithstanding some short-term noise and near-term ‘QE fatigue’.