As Fed Holds Rates Steady, Tapering Debate Looms Large
It’s reasonable to expect tapering to start toward the end of 2021 or beginning of 2022.
In its latest statement, released on July 28, the Federal Open Market Committee unsurprisingly held the federal-funds rate at 0.0%-0.25%. Nobody expected a change in rates at this meeting, instead the big issue on everyone’s mind relates to the timing of tapering. As a reminder, this meeting contained no new economic projections, only the press release and press conference.
With the median FOMC participant now expecting roughly two rate hikes by 2023 based on last month’s release, Chairman Powell’s comments at the last press conference that they were “talking about talking about” tapering, and the latest minutes (released July 7) showing a robust discussion about asset purchases, the timing of any tapering and/or tapering announcement is clearly on everyone’s mind. To this end, there was a slight change in the language of the release. In regard to the “substantial further progress toward maximum employment and price stability goals” that the FOMC is looking for before starting its tapering, the current release acknowledges that “the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings.” This is starting to set up a path for the FOMC to begin its tapering process. We believed that the FOMC would telegraph its tapering well in advance, and we see this as the start of that process.
While nothing is certain, and the incoming economic data could shift, we think it’s reasonable to expect tapering to start toward the end of 2021 (perhaps at the December meeting) or in the first quarter of 2022 (perhaps at the March meeting). While tapering could theoretically start before then, we think it is unlikely that inflation would prove so high and so persistent over the next several months that it would shift FOMC consensus completely away from its current "transitory" stance by the September meeting, which leaves only the November meeting, a meeting without economic projections.
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