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By: Rhona O'Connell, Head of Market Analysis
And bear in mind that, as Bloomberg put it – this “Staff” consists of more than 400 PhD economists
Tapering expected to start in November or December and be complete by mid-2022. Median expectations for the pace of net purchases point to completion in July next year. This is one to two months earlier than in previous surveys (of primary dealers and market participants). Expectations for target fed funds rate, based on survey responses and interest rate futures moved up slightly since the previous meeting (late July).
Tapering announcements from a number of central banks had already been discounted into the markets. Parts of Latin America and emerging Europe have already tightened due to rising inflation pressures.
Debt ceiling uncertainty (note the ceiling is now raised until December) saw some yields rise for maturities mid-October to mid-November in case of delayed payments [this should now have washed through]. The Fed does have a tool to delay principal payments by rolling forward the operational maturity dates in order to maintain the facility to transfer such securities over Fedwire. Even with this in place, though, the emphasis is that a delayed payment would “create severe and broad-based market disruption”. [Parallel here with Evergrande]. [Note this is now somewhat academic – until December arrives so expect renewed tension mid-November]
Still leaning to transitory inflation
Information available at the time [correctly] suggested slower Q3 rate of GDP growth than Q2. Note that job gains in hospitality in August were zero; suggest that this is seasonal and that as of August total payroll employment had retraced three-quarters of the losses at the onset of the pandemic. Labour demand remained extraordinarily high. Employment Cost Index of hourly compensation in the private sector; 3.6% over the six months ending in June. Total PCE price inflation was 5.3% in 12 months to August; core at 4.0%. Staff Common Inflation Expectations Index little changed against Q2 and near the average over the decade before the pandemic.
Consumer confidence under some pressure.
Business fixed investment growth slowing in Q3 due to bottlenecks weighing on business equipment spending, especially in autos.
Economic outlook
Despite bottlenecks resolving more slowly than previously expected and rising COVID cases restricting consumer spending, the outlook for GDP was for a sizeable gain in H2 2021; GDP growth in 2022 expected to be solid and real GDP growth expected to slow noticeably in 2023 but to remain well above potential over the projection period, taking unemployment to historically low levels.
Inflation still expected to be transitory. PCE price inflation expected to be a little below 2% in 2022 but edging high hereafter to reach 2% in 2024.
Risks to economic activity still skewed to the downside, while there is increased risk of inflation becoming more persistent.
Financial situation
COVID and Evergrande concerns had little net effects on financial asset prices.
Medium-term Treasury yields improved modestly, market-implied path of fed funds rate steepened. Market-based financing conditions were robust.
Position: inflation elevated, transitory. Overall financial conditions accommodative reflecting measures to support the economy and the flow of credit to U.S. households and businesses. Economy’s path remains virus-dependent. Still content to allow inflation to exceed 2% for some time in order to anchor inflation expectations at 2%. Prefer to use “elevated” rather than “risen”.
Committee unanimous on keeping fed funds target range at 0-0.25% until labour market is consistent with the dual mandate. Noted the economy’s good progress since last December’s commitment to maintain purchases at $120Bn per month and that if progress is broadly as expected than moderation in the pace of purchases would “soon be warranted”.
Committee will be prepared to adjust policy as appropriate should risks emerge. Policy assessment to include public health, labour market conditions, inflation pressures and inflation expectations, and financial and international developments.
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