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Here’s what will happen when the Fed’s ‘tapering’ starts, and why you should care



The Marriner S. Eccles Federal Reserve building in Washington.

Stefani Reynolds/Bloomberg via Getty Images

Likely before the end of the year, the Federal Reserve will start to tiptoe into the unknown.

Central bank officials indicated Wednesday that they’re ready to begin “tapering” – the process of slowly pulling back the stimulus they’ve provided during the pandemic.

While the Fed has gone into policy retreat before, it has never had to pull back from such a dramatically accommodative position. For most of the past year and a half, it has been buying at least $120 billion of bonds each month, providing unprecedented support to financial markets and the economy that it now will start to walk back.

The bond purchases have added more than $4 trillion to the Fed’s balance sheet, which now stands at $8.5 trillion, about $7 trillion of which is the assets bought up through the Fed’s quantitative easing programs, according to the central bank’s data. The purchases have helped keep interest rates low, provided support to markets that malfunctioned badly at the start of the pandemic crisis, and coincided with a powerful run for the stock market.

In light of the role the program has played, Fed Chairman Jerome Powell assured the public Wednesday that “policy will remain accommodative until we have reached” the central bank’s goals on employment and inflation.

Markets thus far have taken the news well, but the real test is ahead. Tapering represents a teeing up of future rate hikes, though they appear to be at least a year in the distance.

“It’s certainly been communicated well, so I don’t think that should be a shock to anybody or cause a disruption to the market,” said Kathy Jones, head of fixed income at Charles Schwab. “The question really is more around asset prices than [interest] rates. We have very high valuations across the board in asset prices. What does this shift away from very easy money do to asset prices?”

The answer so far has been … nothing. The market rallied Wednesday afternoon despite what amounted to a preannouncement for Fed tapering, and roared higher again Thursday.

How things go the rest of the way likely depends on how the Fed stage manages its exit from its money-printing operations.

How it works

Here’s what tapering could look like:

Powell said the official tapering decision could happen at the November meeting and the process would commence shortly thereafter. He added that he sees tapering being finished “sometime around the middle of next year.” That timeline, then, offers a view into how the actual reductions will go down.

If the taper indeed begins in December, reducing the purchases by $15 billion a month would get the process down to zero in eight months, or July.

Jones said she would expect the Fed to cut Treasurys by $10 billion a month and mortgage-backed securities by $5 billion. There have been some calls from within the Fed to be more aggressive with mortgages considering the inflated state of housing prices, but that seems unlikely.

Federal Reserve Chair Jerome Powell testifies during a U.S. House Oversight and Reform Select Subcommittee hearing on coronavirus crisis, on Capitol Hill in Washington, June 22, 2021.

Graeme Jennings | Pool | Reuters

Powell’s general tone during this post-meeting news conference surprised Jones. The chairman repeatedly said he is satisfied with the progress made toward full employment and price stability. With inflation running well above the Fed’s comfort zone, Powell said “that part of the test is achieved, in my view, and in the view of many others.”

“The tone was perhaps a little bit more hawkish than the market expected when it comes to tapering,” Schwab’s Jones said. “That comment that the Fed will finish by the middle of next year, it was like, ‘OK, we had better get a move on here if we’re going to do that.'”

Jones said that Powell’s comments and the Fed’s tapering intentions reflected a high level of confidence that the economy continues to recover from the pandemic-induced recession, which was both the shortest and steepest in U.S. history.

“The Fed is telling us that it collectively expects growth and inflation to be pretty strong over the next year, and they’re ready to withdraw the easy policy,” she added.

A view to a rate hike

What happens after the taper is what’s really important.

The summary of individual members’ rate forecasts – the vaunted “dot plot” – indicated a slightly more aggressive posture. The 18 members of the policymaking Federal Open Market Committee are about split on whether to enact the first quarter-point hike next year.

Officials see as many as three more hikes in 2023 and in 2024, bringing the Fed’s benchmark borrowing rate to a range between 1.75% and 2%, from its current 0 to 0.25%. Powell stressed the Fed will move carefully before raising rates and likely will wait until tapering is complete, but the market will be watching for more hawkish indications.

“The next Fed meeting could be really interesting. It should give us a lot more volatility than we’re seeing now,” said John Farawell, head trader with bond underwriter Roosevelt & Cross. “They did sound more hawkish. It’s going to be data-driven and going to be about how Covid plays out.”

For investors, it will be a new world in which the Fed is still providing support but not as much as before. While the mechanics sound simple things could get complicated if inflation continues to run above the Fed’s expectations.

FOMC members upped their 2021 core inflation estimate to 3.7%, increasing it from the 3% projection in June. But there’s plenty of reason to believe that there’s considerable upside to that forecast.

For instance, in recent days economic bellwether companies including General Mills and Federal Express have indicated that prices are likely to rise. Natural gas is up more than 80% this year and will mean substantially higher energy costs heading into the winter months.

UBS forecasts that economic conditions and the tapering news will start putting upward pressure on yields, driving the benchmark 10-year Treasury to 1.8% by the end of 2021. That’s about 40 basis points from its current level but “should not have a significant adverse effect on borrowing costs for companies or individuals,” UBS said in a note for clients.

Yields move opposite prices, meaning that investors will be selling bonds in anticipation of higher rates and less Fed support.

Analysts at UBS say investors should keep in mind that the Fed is moving forward because it is getting more confident in the economy, and still will be providing support.

“While higher bond yields lower the relative attractiveness of equities, a gradual rise in bond yields should be more than offset by the positive impact from rising earnings as economies return to normal,” the firm said. “Tapering should thus be seen as the gradual withdrawal of an emergency support measure as conditions normalize.”

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Celtics game broadcast stopped after Enes Kanter slams Xi



Enes Kanter #11 of the Boston Celtics handles the ball against the Portland Trail Blazers at The Arena at ESPN Wide World Of Sports Complex on August 02, 2020 in Lake Buena Vista, Florida.

Mike Ehrmann | Getty Images Sport | Getty Images

GUANGZHOU, China — The National Basketball Association could once again face a backlash in China after Boston Celtics player Enes Kanter tweeted a video in support of independence for Tibet.

Not long after the tweet on Wednesday, highlights from the Celtics’ game against the Knicks were made unavailable on the Tencent Sports app. Upcoming Celtics games also appear to be unavailable for live stream.

China-based Tencent declined to comment when contacted by CNBC.

In a video posted on Twitter, Kanter called Chinese President Xi Jinping a “brutal dictator” and said he supports Tibetan people’s “cause for freedom.” The NBA star, who has commented on political issues before, repeated the phrase “free Tibet” three times while wearing a t-shirt with the Dalai Lama on it.

“Under the Chinese government’s brutal rule, Tibetan peoples’ basic rights and freedoms are non-existent,” Kanter said. China’s Ministry of Foreign Affairs was not immediately available for comment.

Chinese communist troops took control over Tibet in 1950. China has held that Tibet has long been part of its territory and that the military action was part of a peaceful liberation of the region. China has denounced the current Dalai Lama, who Buddhists see as their spiritual leader and who is currently in exile in India, as a separatist. The Dalai Lama has denied he is a separatist.

In June last year, independent United Nations experts “raised their concerns regarding a range of issues of grave concern” including the “collective repression of the population, especially religious and ethnic minorities, in Xinjiang and Tibet.”

China has repeatedly said that issues related to Tibet, the northwest region of Xinjiang, and Hong Kong are not human rights issues. China maintains that these are “internal affairs” and other countries should not interfere.

The Boston Celtics and NBA China were not immediately available for comment when contacted by CNBC.

On Chinese Twitter-like service Weibo, one Boston Celtics fan account with 615,000 followers said they would no longer post about the team.

The NBA, the most popular U.S. sports league in China, has faced backlash before over sensitive issues.

In 2019, the then-Houston Rockets General Manager Daryl Morey sent a tweet in support of anti-government protests in Hong Kong. He later apologized. But the incident caused a major fallout including broadcasters suspending the showing of Rockets games and commercial partners cutting ties with the team.

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Putin to order Russians to stop work for a week as Covid deaths soar



A customers wears a protective face mask inside a cafe as a television screen displays Russian President Vladimir Putin.

Bloomberg | Bloomberg | Getty Images

Russians have been told to take a paid week off work in order to try to combat the Covid-19 crisis in the country, as the number of daily deaths from the virus hit its highest level since the start of the pandemic.

On Wednesday, the Kremlin announced that, “in order to prevent further spread of the novel coronavirus (Covid-19) and to protect public health, the President has announced that October 30 to November 7, 2021, inclusive, will be paid non-working days.”

The Kremlin said it recommended that the measure be implemented across Russia. To date, the country’s separate regions have largely been in control of designating their own Covid rules and restrictions throughout the public health crisis. 

At a meeting with the government Wednesday, Putin told officials: “We know that, unfortunately, this problem is also escalating, and that it is impossible to overlook it.” He announced that he supports the proposal for a week of paid, non-working days from Oct. 30, and for this to start earlier in regions particularly badly hit by Covid cases.

The move comes as Russia, which has been one of the hardest hit countries by Covid, battles a rising Covid death toll. On Thursday, it reported a record high 36,339 new infections and 1,036 fatalities. To date, there have been 227,389 Covid deaths in Russia and it has recorded over 8.1 million infections.

How bad is it?

Russia’s daily cases and death tolls have been creeping up for weeks now, largely because a significant proportion of the population remains unvaccinated. Covid vaccines are proven to greatly reduce the risk of severe infection, hospitalization and death.

On Wednesday, Putin once again implored Russian citizens to take up the vaccine, stating that: “we are seeing the dangerous consequences of the low vaccination levels in our country. I repeat once again: vaccination really reduces the risks of severe illness or serious complications after, and the threat of death … I also once again urge all citizens to get vaccinated. This is about protecting yourself, about your safety, even your life, your relatives’ health.”

There are also concerns about waning immunity in those who are fully vaccinated, as clinical data shows immunity provided by Covid vaccines wanes after around six months).

Another worry is the discovery of a mutation of the delta variant — currently the dominant strain worldwide — that is being identified in increasing numbers in the U.K., which is also seeing a dramatic spike in cases. Although the mutation has been found in Russia, it’s too early to tell if it is having an impact on rising infection numbers.

Read more: The delta variant has a mutation that’s worrying experts: Here’s what we know so far

Russia’s Deputy Prime Minister Tatyana Golikova presented the country’s epidemiological situation to Putin and the government on Wednesday, noting that the situation “is becoming more complicated.”

“For over a month, we have seen a steady growth in the incidence and today, the number of new Covid-19 cases reported is approaching 35,000 a day,” she said, with incidence rates increasing in all age groups. She also described a “very heavy burden on the healthcare system” as hospitalizations rise.

“There are currently 276,500 beds deployed in the Russian Federation, of which 66.1% are equipped with oxygen. As of yesterday morning, 86.6% of all beds in the country were occupied,” Golikova noted. “We are particularly worried about the growing death rates from COVID-19. Recently, we have been losing over 1,000 people every day. These are terrible figures.”

Russia’s Covid vaccination rate has been a persistent bugbear for the state given that the majority of the population are skeptical of receiving Russia’s own vaccine, Sputnik V.

Read more: Putin says Russia won’t make Covid vaccines compulsory, but skepticism remains a problem

“I would like to emphasise that the grievous course of the disease and the high death rates are being observed in unvaccinated people. We are seeing a gradual increase in the vaccination rates, but it is still insufficient. Today, this figure is a little over 45%,” Golikova said.

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Ryanair CEO worried about sustainable aviation fuel and food prices



The CEO of Ryanair has acknowledged the need for ambitious sustainable aviation fuel targets while also expressing concerns about how food prices could be affected.

During a discussion at CNBC’s Sustainable Future Forum on Wednesday, Michael O’Leary said his firm was investing “a lot of money” with Trinity College Dublin on research into sustainable aviation fuel, or SAF. In April, the two organizations launched a sustainable aviation research center backed by a 1.5 million euro ($1.75 million) donation from the airline.  

As well as focusing on SAF, the center will look at noise mapping and zero-carbon propulsion systems for aircraft.

Ryanair has itself set a target of powering 12.5% of its flights with SAF by the year 2030. But speaking to CNBC’s Steve Sedgwick, O’Leary said he thought it was “a very ambitious target – I’m not sure we’ll get there.”  

He went on to articulate his feelings about the wider effects of increasing SAF usage. “I do worry over the longer term, though, on sustainable aviation fuels … what’s that going to do to food prices going forward?”

Read more about clean energy from CNBC Pro

“I think we’re going to reach a point in the next 10 or 20 years where there will be challenges posed not just for the airline industry, but for industry in general, around sustainable aviation fuels where it may have an upward impact on food prices.”  

Although the European Union Aviation Safety Agency says there’s “not a single internationally agreed definition” of sustainable aviation fuel, the overarching idea is that it can be used to reduce an aircraft’s emissions. 

Aircraft-maker Airbus describes sustainable aviation fuels as being “made from renewable raw material,” for example, “crops based or used cooking oil and animal fat.”

Despite his concerns, O’Leary said he was certain that ambitious targets needed to be put in place.

“The European Union has set a target of 5% of sustainable aviation fuel by 2030,” he said. “We think we can do better than that – I think we’ll get to 10%.”

“Whether we can get to 12 and a half percent, I’m not sure, but I know if we don’t invest in the research and that technology now, we certainly won’t get there.”

Huge challenges

According to the International Energy Agency, carbon dioxide emissions from aviation “have risen rapidly over the past two decades,” hitting almost 1 metric gigaton in 2019. This, it notes, equates to “about 2.8% of global CO2 emissions from fossil fuel combustion.”

Elsewhere, the World Wildlife Fund describes aviation as “one of the fastest-growing sources of the greenhouse gas emissions driving global climate change.” It adds that air travel is the most carbon intensive activity an individual can do.

As concerns about sustainability and the environment mount, discussions about aviation have increasingly focused on how new innovations and ideas could reduce the sector’s environmental footprint.

In September 2020, for instance, a hydrogen fuel-cell plane capable of carrying passengers took to the skies over England for its maiden flight.

The same month also saw Airbus release details of three hydrogen-fueled concept planes, with the European aerospace giant claiming they could enter service by the year 2035.  

O’Leary was cautious when it came to the outlook for new and emerging technologies in the sector.

“I think … we should be honest again,” he said. “Certainly, for the next decade … I don’t think you’re going to see any — there’s no technology out there that’s going to replace … carbon, jet aviation.”

“I don’t see the arrival of … hydrogen fuels, I don’t see the arrival of sustainable fuels, I don’t see the arrival of electric propulsion systems, certainly not before 2030,” he went on to say.

“So it will certainly be after my career in the airline industry is finished … but I hope it will get here before the end of our mortal lives.”

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