Fed doubles rate of tapering, eyes 3 rate hikes next year

Yahoo Finance's Brian Cheung discusses the Fed's plan to end bond buying by March and officials forecasting three rate hikes in 2022.

Video Transcript

- Let's get to the Federal Reserve and what we heard from the Fed yesterday. As I mentioned, pretty much right in line with expectations in terms of what the wind down of the bond buying program is going to look like. Maybe a surprise-- Brian Cheung, who's joining us now and who covers the Fed for us-- maybe a surprise perhaps on the dots that you were watching so closely.

BRIAN CHEUNG: Yeah. Well, certainly the big announcement from yesterday's Federal Reserve meeting was that the Fed is going to hold interest rates at near zero. But it won't be long before the Fed starts to eventually raise interest rates. They hope to do that once they finish up this expedited tapering program, which would bring their asset purchase program to an end by March of next year. That would give the Fed earlier optionality and perhaps the option to get even more aggressive with raising interest rates after that point.

In time, you could see the new dot plot projections ahead of you, which map out the 80 members of the committee and where they could see rates going in the next few years. Very notable to see none of the 80 members see the case for no interest rate hikes through the end of next year. That's a big change from that last print that we had gotten in September where nine of the committees and nine members of the committee saw the case from no interest rate hikes. But the other nine saw the case for at least one rate hike.

But what's very interesting is the kind of financial environment in which the Fed might be hiking rates. Some concern that with the 10-year as low as it is right now. Last I saw about 147 basis points that really the Federal Reserve could be hiking rates into a flattened yield curve, which could perhaps flag concerns about a recession. But take a listen to Fed Chairman Jerome Powell's press conference response to my question about whether or not he was concerned about the steepness of the yield curve. Take a listen.

JEROME POWELL: Look at global sovereign yields around the world. Look at JGBS. Look at bonds. And they're so much lower. You can get-- you know, a much higher yield on US treasuries by buying USTs rather than bonds. And you can hedge that-- hedge of the currency risk back into Yen, back into Euros and still be way ahead. So in a way, it's not surprising that there's a lot of demand for for US sovereigns in a world-- you know, in a risk-free world where-- where there's so much-- they're yielding so much more.

BRIAN CHEUNG: Really interesting remark from the Fed Chairman because my question to him was really trying to get at well, are you worried that if you try to raise interest rates on the short end, you'll actually invert the curve, which by the way when you take a look at 2's and 10's that actually usually is a bellwether for a recession. You can see the spread between the two in the 10 year headed into this meeting has been falling pretty precipitously. We're not close to inverting. We're not close to those negative numbers.

But, we saw that happen in 2019. And that definitely didn't per se predict the-- the pandemic happening, which really showed just how sensitive markets were ahead of the pandemic. But Powell's response to me was, here's what you can do-- you can buy US treasuries and then you can hedge the currency risk back into Yen and Euros to make some money. So maybe that was the former PE person putting his Carlyle hat back on to recommend a trade there. But, you know, Powell basically saying, I'm not concerned about where the long bonds are trading. He said really the focus for right now when it comes to hiking interest rates is where does the economy look in terms of employment and also inflation.

- Maybe once an investment banker, always investment banker. I don't know exactly.


- How that works. Speaking of bankers, of course, the Fed met yesterday with the Bank of England and the ECB's turn this morning. And you and I were talking in the break, really there's the spectrum with the three of-- the three central banks arrayed along it, right? You've got the Bank of England kind of most hawkish, then you've got the Fed and then you've got the ECB way out on the other side of the spectrum here.

BRIAN CHEUNG: Yeah. Well, certainly this is kind of a very interesting and noisy week. We had already talked about this at the beginning of the week. This is going to be central bank palooza. And of course, yes we did have the Bank of England and the European Central Bank making announcements this morning. So as you mentioned, really a big spectrum across the board. The Bank of England announcing that it was actually going to raise interest rates.

And by the way, it wasn't a close vote. It was an 8 to 1 vote from the Bank of England's monetary policy committee to raise interest rates to at 25 basis point target. That was a 15 basis point increase for the Bank of England. And they voted to maintain the amount of quantitative easing that they're doing right now at about 895 billion pounds.

Now, on the other side of the coin, though, you have the European Central Bank pretty much remaining dovish although they are also going to taper. Much like the Federal Reserve, they hope to end their pandemic emergency purchase program. This is one of the main envelopes that they've been using since the depths of the pandemic to signal to markets. Its support of accommodative policy. They hope to wrap that up by March of next year. That's basically the exact same timing as what we had here on the Federal Reserve.

But, their messaging when it comes to interest rate hikes after that is not as aggressive as we saw here in the United States where the Fed message not just one but the possibility of three interest rate hikes as the medium member projected in those plots yesterday. That's going to remain a very big story when we talk about those sovereign yields guys as Jerome Powell was talking about in that clip that we just played.

Keep in mind the divergence that could be happening here with some central banks raising interest rates, others not. That could create some very interesting interest rate differentials, which could really change dynamics in APEX markets and just kind of broadly where the economic recoveries are going to be, just kind a reminder that the Omicron variant impacting England more than the United States at least so far. We'll see if that weighs on the Federal Reserve if Omicron ends up being a bigger issue in the meetings to come.

- Yeah. And we're going to talk to a rates and effect strategist a little bit later on Ed al-Husseini So we'll have to ask him about how people might jockey for positioning with that going on. Thanks so much, Brian. Appreciate it.

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