<FOR INTERNAL USE ONLY>

September FOMC Meeting Recap: Inflation Target Achieved & Advance Notice of Tapering Served

Powell comments that “a reasonably good” September payroll report would suffice for the Fed to start tapering, and the tapering would be very gradual and end around mid-2022.

Summary

As widely anticipated, the Federal Open Market Committee (FOMC) keeps policy rates on-hold and its asset purchase program unchanged (for now) as it moved closer to tapering and appeared willing to hike policy rates earlier than before.

Main Points

• The most important message appears to be in the statement: “if progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.” This signals a formal tapering announcement could come at the November meeting.
• The updated dot plot in the Summary of Economic Projections (SEP) shows that 18 voting members are evenly split on the timing of rate liftoff, which raised the median projection to a 25 basis points hike by the end of 2022 (vs. no rate hike in 2022 at its June meeting). The median projection also implied three additional rate hikes each in 2023 and 2024.
• During the presser, Powell acknowledged that it would take “a reasonably good” September payroll report (due out October 8th) for the Fed to start tapering, and the tapering would be very gradual and end by mid-2022. Imminent tapering does not indicate rate hikes are around the corner as most committee members prefer to see maximum employment before hiking rates.
• The FOMC updated its characterization of inflation from “has risen” to “is elevated,” again emphasizing the “transitory” nature of recent price pressures.
• The FOMC raised its 2021 unemployment rate projection from 4.5% to 4.8% but kept its 2022 projection unchanged at 3.8%, suggesting the Fed now expects a more gradual labor market recovery amid the delta variant resurgence.

Implications: “Taper tantrum” is unlikely when the Fed actually starts tapering

The 10-year UST yield remained calm (down ~1 bp) following the FOMC update (2PM EST), suggesting the bond market was not surprised. Judging from the calmness, “taper tantrum” is unlikely when the Fed does taper. Equity markets’ reaction was somewhat mixed as they fluctuated during Powell’s presser. Energy was the best performing sector for the day. Gold was down, and DXY was up.

To review graphs click here: FOMC Insights _ 2021 0922 Graphs