<FOR INTERNAL USE ONLY>

November FOMC Meeting Recap: Tapering to Commence in Mid-November & Less Conviction in Fed’s View of “Transitory” Nature of Inflation

Powell comments that inflation should ease by the second or third quarter next year, and the Fed is not “behind the curve” on inflation.

Summary

As widely anticipated, the Federal Open Market Committee (FOMC) voted unanimously to leave the funds rate target range unchanged at 0–0.25%, and formally announced that it would reduce asset purchases by $10 billion of Treasury securities and $5 billion of agency Mortgage-backed securities (MBS) per month starting in Mid-November, respectively.

Main Points

• The most important message appears to be that Powell pushed back against expectation that a rate liftoff (tightening) would eventually come by late summer in 2022 as already priced in financial markets. Powell explicitly stated that tapering decision would be separate from the timing on an eventual rate liftoff, and the conditions for a rate liftoff would be more stringent. When asked about the timing on rate liftoff, Powell commented that the test for “substantial further progress” has not yet been met particularly on the maximum employment side.   
• The FOMC appears to have less conviction in the “transitory” nature of inflation as it changed its characterization of inflation from “inflation is elevated, largely reflecting transitory factors” to “inflation is elevated, largely reflecting factors that are expected to be transitory.” During the presser, Powell commented that inflation should ease by the second or third quarter next year, and the Fed is not “behind the curve” on inflation.
• If the current pace ($10 billion of Treasuries and $5 billion of MBS per month, respectively) is maintained, the tapering process will be completed in June 2022, injecting another $420 billion into the system. Powell commented that the Fed would be flexible in the pace of tapering as it could speed up or slow down tapering “if warranted by changes in the economic outlook.”

Implications: Timing on rate liftoff depends more on unemployment than inflation

Following the release at 2pm EST, the short end of the Treasury curve was little changed on Powell’s pushback against raising rates, but the longer end appeared to question whether the Fed is falling behind the curve on inflation (the 10-year UST yield closed up 1 bp to ~1.58%). The USD (DXY) fluctuated before closing lower. Equity markets rallied to all-time highs on the lack of urgency to raise rates.

To review graphs click here: November FOMC Graphics