By: Rhona O'Connell, Head of Market Analysis
Rhona O’Connell | Head of Market Analysis, EMEA and Asia regions
Powell: Tapering decision looks likely at the next meeting
These are the key points arising from the Federal Reserve’s economic projections along with Jay Powell’s Press conference and some of the key takeaways from the Q&A session
“If progress continues broadly as expected the Committee judges that a moderation in the pace of asset purchases may soon be warranted. We also discussed the appropriate pace of tapering asset purchases once economic conditions satisfy the criterion laid out in the Committee’s guidance. While no decisions were made, participants generally view that, so long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate.”
The criteria for rates lift-off are different and substantially more stringent, relating to the dual mandate. Half the FOMC believes the right conditions will be in place by end-2022, but this is not a firm forecast.
Rates are to be kept near zero and the current pace of asset purchases will be maintained for now. This, along with strong guidance on interest rates and the balance sheet, will keep monetary policy supportive until the recovery is complete. Real GDP was 6.4% in H1 2021 and is growth widely expected to maintain a strong pace in H2. The dot plots for September show some upward shifts within the overall expected target median band for fed funds, but the overall profiles for 2022 and 2023 did not rise. The projection profile for 2024, which has been included for the first time, is 50 basis points higher than for 2023.
Dot plots, June and September
Source: Federal Reserve Board
Inflation is likely to remain elevated before upward pressure moderates; bottlenecks are still restricting the potential to respond to strong demand – and they have been larger and longer than anticipated, hence the upward revision to inflation. Bottlenecks, hiring difficulties and other constraints could again prove to be greater and longer-lasting than anticipated. In response to a question on inflation, Mr. Powell pointed to the forecast “very modest overshoot” two and three years out (2.1 and 2.2% vs 2% target) and he believes they are very much on track to achieve the average 2% target. The ultimate test is anchoring inflationary expectations at 2% over time.
The current approach suggests the end of the taper around mid-2022. Mr. Powell noted that asset purchases have been critical in helping to preserve stability of the financial system, notably market functioning initially and then providing accommodative conditions to support the economy; when asked about the tapering timeline and what thinking lies behind the differing opinions on the Committee, he noted that there is “very broad support” across the Committee for the current plan, both as to the timing and the pace of the taper. The vote was unanimous, although some would prefer to have gone sooner and we have seen that publicly; others have different concerns. He pointed out that the current purchases are less useful, as a whole, than they were at the outset, so this is the appropriate way to go. In addition, tapering takes a matter of months so at the end of the taper we will be “well away” from the appropriate conditions for rate lift-off.
Asked about the dual mandate tests (reference to tapering in this context), he said that they appear to have “achieved more than substantial further progress” in the tests for inflation; now it’s a question of maximum employment. Indicators show that since last December, when the tests were articulated, in many cases unemployment is already down by “between 50 and 60%” of the distance between the unemployment rate in December and typical assessments of the natural rate. “That could be [deemed to be] substantial further progress. Many on the Committee think it has been met, others think it’s “close”. His opinion is that it’s “all but met”. The Committee may well decide as soon as the next meeting that it has been met
Federal Reserve Board Members’ economic projections under their individual assumptions of projected monetary policy
Source: Federal Reserve Board
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