September Fed meeting preview: What’s the next move for winding down pandemic support?

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The Federal Reserve will likely be plotting an exit strategy at its September meeting, hoping to figure out how to back away from the dramatic and sweeping measures it took to backstop the economy during the coronavirus pandemic — all without causing a scene.

That’s easier said than done for the Federal Open Market Committee (FOMC). To be sure, the U.S. economy has patched itself up since the outbreak cratered employment, while spending and growth have rebounded to pre-virus levels. Yet, crosscurrents are still strong, meaning Fed support might still be needed.

Millions remain out of work and a disappointing August jobs report poses questions about the vitality of the labor market rebound. At the same time, consumer prices are at their highest in 13 years, raising asset bubble concerns, though the pace of those gains have slowed over the past three months. Economists, meanwhile, are downgrading their growth estimates for this year amid a rapidly spreading Delta variant and waning fiscal stimulus.

The Fed’s main measures of stimulating the economy have been a $120 billion-per-month bond-buying program and rock-bottom interest rates. Officials are nowhere near ready to start hiking borrowing costs, but they are setting their sights on when to slow down their asset purchases.

Here’s what you should be aware of ahead of the Fed’s Sept. 21-22 meeting, including key questions facing Fed officials and how the announcement could impact you.

1. Will the Fed give any clues about when it plans to buy fewer bonds?

Fed watchers will be parsing the Fed’s post-meeting statement for clues on when it plans to start slowing its bond-buying — a process known as “taper” — but experts aren’t convinced the U.S. central bank is ready to commit.

That’s because policymakers have varying levels of disagreement over the direction of the economy.

Employers added fewer jobs in August than expected, challenging the goal of “substantial further progress” that officials have said they’d like to see in the labor market before touching their asset purchases. At the same time, inflation is showing signs that it’s moderating, despite soaring above the Fed’s average target of 2 percent for most of 2021. While the Fed is unlikely to react to one month’s worth of data, officials might also judge that they need to be patient — and have more time on their side to do it.

On the other hand, some Fed officials might want to start tapering sooner rather than later. An earlier exit gives them ample time to finish tapering assets before raising interest rates. And even if the labor market may still be working through pandemic-driven quirks, policy would still be historically accommodative even as it dials back bond buying.

Bridging the gap between those two camps will be the biggest challenge for the Fed, and it might mean that the U.S. central bank kicks the taper can further down the road.

“It’s the outlook that leads to the lack of consensus,” says Greg McBride, CFA, Bankrate chief financial analyst. “The Delta variant has certainly led to some softening in some aspects of the economy, and for some members of the Fed, it’s enough to give them pause. Other members of the Fed may view the recent economic softness as nothing more than a bump in the road, but the longer-term recovery is intact.”

2. How much of a rush is the Fed in to start tapering?

New York Fed President John Williams argued in a September speech that the Fed could start to remove support for the economy even if job gains prove to be dull. St. Louis Fed President Jim Bullard, a longtime dove, also said in August that the Fed has to “get going” on taper.

The Fed admitted in its July meeting that the economy had shown “progress,” hinting that the taper timeline could be moving closer, while records of that meeting also showed that officials discussed kickstarting taper at some point this year, should the economy evolve as expected.

“The Fed wants to get tapering out of the way,” says Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management, who expects that the Fed will formally announce taper parameters in November. “They want to make it like watching paint dry, and the way you let it be like watching paint dry is letting it happen slower.”

The longer the Fed waits to formalize its taper decision, the riskier it could be for Chairman Jerome Powell’s main goal: giving investors ample notice before officially tapping the brakes. Markets whipsawed in 2013 when the Fed similarly started to back away from its asset purchases, with stock prices falling and yields rising in even that’s known today as “the taper tantrum.”

“The Fed judges the success or failure of communications on whether or not they move the market,” Schutte says. “They don’t want to move the market unless it’s what they did last March and April, when it’s for shock-and-awe value.”

Choppy markets could be a hazard for 401(k)s, retirement accounts and investments in the short-term. But experts say the Fed’s ongoing — and very public — debate over when and how to taper might reduce the chance of another backlash.

“At the very least, the market knows a noticeable portion of the Fed is gearing up for that taper process,” says Lindsey Piegza, chief economist at Stifel. “Most recognize the economy is in a substantially stronger place than it was last year, meaning the Fed will be gearing up to remove some of these emergency measures in the near term.”

The Fed’s asset purchases have sent mortgage rates to record lows, though taper might not have the opposite effect. Investors might take it as a sign that the Fed has a more hawkish stance on growth and inflation, which could cause yields on the 10-year Treasury — the benchmark for the 30-year fixed-rate mortgage — to drift even lower.

Along the way, the Fed might risk raising other financial stability concerns by lingering for too long as the biggest buyer in the marketplace.

“What problems are they trying to solve by continuing these emergency measures?” Piegza asks. “The labor market is very solid, the housing market is taking off, manufacturing is performing well, businesses are opening back up. And the economy is on track for its best growth record in decades.”

3. What will the latest economic and interest rate forecasts suggest about the direction of the economy?

Due up at the Fed’s September meeting are updated projections on where officials see growth, inflation, unemployment and interest rates heading. For the first time, Fed watchers will also get a glimpse at calculations for 2024.

Fed officials in the last update moved up their rate-hike timeline by a full year, with U.S. central bankers penciling in at least two rate hikes by 2023. That means even more rate hikes could be on deck for 2024 — a tricky communications tightrope for Powell.

Experts caution against fixating too much on the dot plot since the future remains uncertain. Instead, take a look at how much the Fed adjusts its economic projections for 2021 and 2022, which might offer a better signal because it’s more near-term.

“The only reason the Fed will start raising interest rates when we get to that point is because they feel the economy is in a much better position than when they cut interest rates down to that level,” McBride says.

What it means for you

Homeowners haven’t missed their chance to potentially shave hundreds of dollars off of their  monthly mortgage payment by refinancing. Rates have trickled lower in recent weeks and are still holding near historic lows. Consider shopping around with at least three lenders to find the best rate and opportunity for your wallet.

A Bankrate survey from July found that 74 percent of homeowners haven’t yet refinanced their mortgage. Trimming your housing costs isn’t the only advantage: You might also be able to free up some cash to safeguard your purchasing power as inflation rises. A separate August poll from Bankrate found that 89 percent of U.S. adults have paid higher prices this year — and 66 percent say those gains have negatively impacted their finances.

“If you haven’t yet refinanced, the window of opportunity is still wide open,” McBride says. “That is a way to meaningfully impact the household budget at a time when the cost of so many other things is on the rise.”

When the Fed eventually reverses from its extraordinary accommodation, markets might be choppy, underscoring the importance of taking a long-term approach. But Americans should recognize that as a symbol of confidence for the economy. Nothing bodes well for your wallet more than a strong economic outlook and sustainable rate of growth.

“The boom-and-bust cycles have a much more negative and lasting effect than a long and sustained period of even modest growth,” McBride says. “As the Fed transitions into tapering, and eventually raising short-term rates, the reason they would be doing so is because the economy is in better shape, because unemployment has come down substantially. That type of environment is ultimately good for the household pocketbook, but also good for corporate earnings and stock prices.”

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Written by
Sarah Foster
U.S. economy reporter
Sarah Foster covers the Federal Reserve, the U.S. economy and economic policy. She previously worked for Bloomberg News, the Chicago Tribune and the Chicago Daily Herald.
Edited by
Senior wealth editor