Fed becomingly increasingly comfortable with the prospect of QE tapering – Wells Fargo

The Federal Reserve is becomingly increasingly comfortable with the prospect of tapering its bond purchases according to analysts at Wells Fargo. They point out that absent an employment report shocker or a debt-ceiling crisis, the Fed could make a formal tapering announcement as early as the November meeting. 

Key Quotes: 

“The Fed is currently purchasing $80 billion worth of Treasury securities and $40 billion worth of mortgage backed securities (MBS) each month. Following that formal taper announcement we expect the Federal Reserve to slow its actual bond purchases shortly thereafter, and anticipate it could reduce its net purchases to zero by around the middle of 2022. We still see policy rate increases as some way off. Our policy rate forecast is for an initial 25 bps increase in Q3-2023 and a cumulative total of 75 bps of tightening by the end of that year.”

“Our outlook for Federal Reserve monetary policy is mildly hawkish compared to consensus. Our sense is that a view of a formal taper announcement by the November meeting, and subsequent slowing of bond purchases shortly thereafter, is broadly in line with the consensus. With respect to eventual interest rate increases, we see a faster pace of rate hikes than the consensus forecast. We expect an initial 25 bps rate increase in Q3-2023, one quarter later than the consensus forecast for a rate hike in Q2. However, for the second half of 2023 our forecast for a cumulative 75 bps of rate hikes exceeds the consensus forecast for 50 bps of cumulative tightening.”