The onset of the taper could begin as early as November.
That was one takeaway from the September FOMC minutes.
Officials discussed a simple “illustrative tapering path,” which generally conforms to market expectations, or at least to market expectations as recalibrated over the past two or so months. The path features monthly reductions of $10 billion in USTs and $5 billion in MBS.
Consistent with Jerome Powell’s remarks from the post-meeting press conference, the minutes noted that “participants generally assessed that, provided that the economic recovery remained broadly on track, a gradual tapering process that concluded around the middle of next year would likely be appropriate.”
It now appears that both the scenarios in the stylized figure (below) are too dovish. The Fed clearly intends to finish the taper sooner than September 2022.
“Around half of respondents to the Desk’s surveys of primary dealers and market participants viewed December as the most likely timing of the first reduction in the net pace of purchases, although respondents also attached significant probability to the first reduction coming in November,” the minutes noted, adding that “median expectations for the pace of net purchases were consistent with a gradual tapering of net purchases being completed in July of next year, about one to two months earlier than in the previous surveys.”
Needless to say, the Fed is keen to preserve optionality. “Participants noted that, in keeping with the outcome-based standard for initiating a tapering of asset purchases, the Committee could adjust the pace of the moderation of its purchases if economic developments were to differ substantially from what they expected,” the minutes said.
Not surprisingly, “several” participants wanted to trim the pace of bond-buying more quickly.
Effectively, the Fed announced the taper in the minutes, although it doesn’t seem like markets noticed. Or, more likely, the taper has been priced in for so long that no incremental tweaks were necessary.
The word “transitory” was used just four times, perhaps suggesting Fed officials have adopted Raphael Bostic’s view that “transitory” is now a “dirty word.” The word “inflation,” on the other hand, came up 79 times.
“Participants noted that their District contacts generally did not expect bottlenecks to be fully resolved until sometime next year or even later,” the minutes read. I suppose you can define “transitory” however you like, but beyond a certain temporal threshold, it’ll become a silly misnomer.
Officials fretted that the expected increase in labor force participation hadn’t “yet materialized,” something the Fed attributed to “the resurgence of the virus, childcare challenges and the uncertainties generated by ongoing disruptions to in-person schooling.”
Still, officials were generally upbeat, suggesting that “the accumulated stock of savings, the release of pent-up demand, and progress on vaccinations [should] continue to support household spending in coming months.”
Labor shortages came up. This was another case where the locals seemed less sanguine than policymakers. “Participants noted that their District contacts had broadly reported having difficulty hiring workers,” the minutes said. “The labor shortages were causing firms to reduce hours and scale back production while also leading employers to provide incentives to attract and retain workers, including wage increases and signing and retention bonuses.”
None of that is news, but it just adds more weight to the labor scarcity narrative, which was on full display in the latest JOLTS data, which showed that even as openings declined from July through the end of August, the disparity with hires remained near a record (figure below).
The quits rate hit an all-time high in August.
The minutes also noted that some participants were worried that elevated inflation “could feed through into longer-term inflation expectations.” “Many” officials cited the New York Fed’s survey in that regard.
Note that the latest installment of the poll showed expectations becoming more unanchored, especially among those with less education and lower incomes (figure below).
“A few participants remarked that these survey measures tended to be sensitive to movements in actual inflation,” the minutes went on to say.
That’s the kind of analysis you get from a room full of PhDs — inflation expectations among consumers tend to rise when they (the consumers) notice they’re paying more for the things they need to buy.
Owners’ equivalent rent made a cameo. It should be “monitored carefully,” participants judged, given that “rising home prices could lead to upward pressure on rents.” The figure (below) is updated with Wednesday’s read on September CPI.
As far as any wage-price spiral, officials said there’s “not yet evidence that robust wage growth was exerting upward pressure on prices to a significant degree.” Still, they acknowledged that “the possibility merited close monitoring.”
If you’re wondering, there were no mentions of “stagflation” in the minutes.
But that’s fine, because the media is more than happy to step up (figure below).
Ultimately, the minutes offered few surprises, even as they confirmed quite a few things everyone already knew.
Oh, and “several participants expressed concern that the high degree of accommodation being provided by monetary policy, including through continued asset purchases, could increase risks to financial stability.”
But that’s never stopped anyone before.