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EconoFACTS: Taper Soon as Rate Hikes Bloom

Research & Strategy September 22, 2021
Research & Strategy September 22, 2021

 

In today’s Fed policy pronouncements, we were looking for answers to three key questions.

Did the FOMC take any definitive steps toward the start of tapering?

Yes, it did. The statement said: “If progress [toward the maximum employment and price stability goals] continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.” This sets up a November 3 announcement of a December start (or even a November start), in line with Chair Powell’s Jackson Hole hint that “it could be appropriate to start reducing the pace of asset purchases this year.”

There were no dissenting votes, which could have occurred if this definitive step was not taken given that “many” on the FOMC argued that the “substantial progress” test had been met for employment as well. Also, in the presser, Powell said that it could be “appropriate” to conclude the tapering process “around the middle of next year”. Interestingly, this would give the Fed an option to hike rates at the end of this year or near the start of 2023.

Have the past three months’ economic data and risk developments meaningfully impacted the ‘dot plot’?

Yes, they have. The median projection now includes ½ a rate hike for this year compared to none before (2 of the 11 in June’s no-move camp jumped on the one-hike bandwagon). And, it now has 75 bps worth of tightening in 2023 instead of 50 bps before, with only one no-rate-hike holdout. The inaugural dots for 2024 show a further 75 bps of tightening to a 1.75% endpoint, with, as expected, no one left in the no-change camp.

In there any wavering of FOMC conviction in the transitory inflation narrative?

Yes, there is. The median profile for total PCE inflation (in Q4) was 4.2% y/y for this year (+0.8 ppts), 2.2% for next year (+0.1 ppts), 2.2% in 2023 and 2.1% in 2024 (the latter inaugural projection still above 2.0%). For core PCE inflation, it was 3.7% (+0.7 ppts), 2.3% (+0.2 ppts), 2.1% (+0.1 ppts), and 2.1% (also still above 2.0%), respectively. The revisions to this year were more a recalibration, given the past three months’ surge. However, the upward revisions to next year, and in 2023 for the core, are telling. And given the first look at 2024, could we be headed to “moderately above 2%” inflation for longer than just “some time”?

Bottom line: Today, the Fed moved closer to the start of tapering, appeared willing to raise policy rates more aggressively than before, and revealed a little more concern over inflation. This trifecta of outcomes fits together perfectly.

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Michael Gregory, CFA Managing Director, Deputy Chief Economist and Head of U.S. Economics

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