The Fed on Wednesday moved closer to announcing a timeline for tapering monthly asset purchases.
“If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted,” the new statement read. As expected, officials stopped short of a formal unveil.
In July, the relevant language said the economy had “made progress toward” the Fed’s goals and that the Committee would “continue to assess” that progress “in coming meetings.” The new statement kept the language on progress and dropped the “coming meetings” wording in favor of the new guidance, which preserves optionality.
Since the July meeting, Jerome Powell made explicit that the “substantial further progress” threshold had indeed been met for inflation, but not for the labor market.
The deceleration in core CPI as well as a subpar August jobs report gave the dovish contingent (which includes the leadership) plausible deniability. Even last week’s solid read on retail sales came with a sobering caveat: Spending at restaurants and bars flatlined, consistent with the 42,000 jobs the sector lost last month.
The September statement described inflation as “elevated,” but retained the “largely reflecting transitory factors” language.
Despite the cooler-than-expected read on prices for August, consumers are starting to feel the pinch. Sentiment surveys, including The New York Fed’s, suggest Americans now expect higher prices in the medium-term as well as the short-term, although the former are far from what one might call “unmoored.” Perceptions of buying conditions are very poor, according to the University of Michigan survey.
Economic activity and employment “have continued to strengthen,” and while “the sectors most adversely affected by the pandemic have improved in recent months… the rise in COVID-19 cases has slowed their recovery,” the Fed said. That latter addition marked a nod to the Delta variant.
Once again, the Fed reiterated that “the path of the economy continues to depend on the course of the virus.”
The new statement language likely constitutes the “advance notice” on tapering that officials promised to deliver prior to making a formal announcement. Markets came into the September meeting split on the prospects for a November unveil versus a formal announcement in December. The Fed will have just one more jobs report (September’s) under its belt by the time the November meeting rolls around.
The new dot plot shows officials are split on a 2022 hike.
If there was going to be a hawkish surprise at this month’s meeting, it would have come from the dots. Some saw upside risk there, and arguably, the new plot did indeed constitute a hawkish lean, which in turn prompted some bear flattening in the curve, which later morphed into a bull flattener. “This was marginally more hawkish than anticipated for 2022, but consistent with a gradual pace of tightening once rate normalization commences,” BMO’s Ian Lyngen remarked.
Analysts and STIR traders will spend the rest of the afternoon (and week) doing the usual tasseography, but a cursory glance suggested no real shocker, per se. Equities will almost surely focus on the “delayed” taper.
As for the economic projections, the inflation outlook was revised sharply higher for this year (to 4.2% and 3.7% on headline and core, respectively) and marginally higher for 2022 (to 2.2% on headline and 2.3% on core). The growth outlook was revised lower for 2021 and higher for 2022 (to 5.9% from 7% this year and to 3.8% from 3.3% next). Concerns around consumption raised questions about the economy’s capacity to meet the Fed’s expectations this year.
All in all, September’s statement, dots and projections had an “as expected” feel, although that certainly doesn’t preclude laborious efforts to extract something groundbreaking. Remember: On FOMC days, everyone is an honorary economist, STIR trader and short-end strategist.
The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.
With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months
shown improvement but the rise in COVID-19 cases has slowed their recovery have not fully recovered. Inflation is elevated has risen largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
The path of the economy continues to depend on the course of the virus. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. Last December, the Committee indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage?backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals. If progress continues broadly as expected,
and the Committee judges that a moderation will continue to assess progress in the pace of asset purchases may soon be warranted coming meetings. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.