Fidest – Agenzia giornalistica/press agency

Quotidiano di informazione – Anno 34 n° 316

FOMC QuickTake: Taper Teed Up

Posted by fidest press agency su sabato, 25 settembre 2021

By Jeffrey Cleveland, Chief economist di Payden & Rygel. A “reasonably good” jobs report will likely push the FOMC to announce a taper at its next meeting in November, but a decision has still not yet been made. Talk of rate hikes is still premature, in our view. The Federal Open Market Committee (FOMC) left its policy rate and asset purchase schedule unchanged at the September meeting. However, in its statement, the FOMC announced that a “moderation in the pace of asset purchases” (tapering) “may soon be warranted” if “progress continues broadly as expected.” Fed Chair Powell elaborated on the above phrase during his press conference, saying a “reasonably good” employment report in September (released early October) would likely tip the scales for consensus on the Committee in favor of tapering. Also, in his prepared remarks at the start of the press conference, Powell added that tapering is broadly expected to “conclude by the middle of next year.” Importantly though, Powell emphasized that “we haven’t decided to taper yet and we haven’t decided the pace yet.” Along with the statement, the FOMC released a quarterly update to its Summary of Economic Projections. The median FOMC member (remember: all FOMC participants submit dots, but not all dots vote) expects GDP growth of 5.9% in 2021, down from 7% as of the June meeting. The median member also expects an unemployment rate of 4.8%, up from 4.5% as of June, probably reflecting the Delta variant concerns. While growth and employment expectations were revised lower, inflation expectations moved up. The median dot for core PCE inflation is now 3.7% in 2021 (up from 3.0%) and 2.3% and 2.2% in 2022 and 2023, respectively. Perhaps most importantly for markets, two more members of the FOMC joined their colleagues in expecting at least one rate hike next year, bringing the total to nine members, or half of the Committee, looking for a rate hike in 2022 (see Chart). The other half still expects no rate hikes next year. Thus, the median “dot” has roughly one rate hike in 2022, 2.5 rate hikes in 2023, and 3 rate hikes in 2024. Taken at face value, Powell’s comment that tapering could “conclude” by the “middle of next year” and the median Fed “dot” penciling in 6.5 rate hikes through the end of 2024 represent somewhat hawkish outcomes of the meeting. Interest rate futures imply market expectations of just four rate hikes over the same period.That said, it’s worth noting that Powell once again reiterated that while tapering is a decision the FOMC will take up again at its November meeting, the test for a rate “lift-off” is “so much higher” and will be addressed once tapering is complete. From our perspective, and Powell’s optimism notwithstanding, the U.S. labor market is more than a year away from “maximum employment.” Total employment still remains 5% below pre-Covid levels. By comparison, when the Fed began tapering in 2014, U.S. employment had already recovered to pre-recession levels. In other news, Chair Powell does not see the Evergrande issue as something for the U.S. to be concerned with, elaborating that there “was not a lot of direct U.S. exposure” and would that he would “not draw a parallel to the U.S. corporate sector.” Bottom line: the FOMC has not decided to taper or the pace at which they will reduce asset purchases. However, one more good jobs report appears to be enough to meet the Committee’s collective threshold. But, even if tapering starts in December and concludes by the middle of next year, any expectation for a 2022 “lift-off” would be premature in our view.


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