EconoFACTS

August 18, 2021 | 15:12

Tapering by Yuletide

Economist

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

Michael is part of the team responsible for forecasting and analyzing the North American economy and financial m... (Read more)

Michael Gregory , CFA

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

Michael is part of the team responsible for forecasting and analyzing the North American economy and financial m... (Read more)

Tapering QE was the key topic of the July 27-28 FOMC meeting. The Minutes showed that, although “all participants assessed that the economy had made progress” toward the maximum-employment and price-stability goals, most judged that the tapering prerequisite of "substantial further progress" had not yet been met for maximum employment. We suspect the strength of July’s employment report may have convinced some holdouts that the precondition would very soon be met, if it hadn’t finally been met with that report.

Most participants, however, judged that the tapering perquisite had been met for price stability. Holdouts here pointed to the transitory nature of the recent inflation surge, along with the recent declines in longer-term bonds yields and market-based measures of inflation compensation, as casting “doubt on the degree of progress that had been made.”

Nevertheless, “most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year” because they saw the tapering criterion “as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum-employment goal.”

In terms of composition, “most participants remarked that they saw benefits in reducing the pace of net purchases of Treasury securities and agency MBS proportionally in order to end both sets of purchases at the same time.” In terms of pace, there wasn’t a ‘mostly’ held view. “Many participants saw potential benefits in a pace of tapering that would end net asset purchases before the conditions currently specified in the Committee's forward guidance on the federal funds rate were likely to be met.” However, “many participants noted that… it would be important that the Committee clearly reaffirm the absence of any mechanical link between the timing of tapering" and a rate hike.

Finally, “several participants indicated that they would adjust their views on the appropriate path of asset purchases if the economic effects of new strains of the virus turned out to be notably worse than currently anticipated and significantly hindered progress toward the Committee's goals.” As Chair Powell mentioned yesterday, the Fed is still in a wait-and-see mode with respect to the Delta variant.

Bottom line: We look for tapering to commence before the end of the year, telegraphed as soon as the next FOMC meeting on September 22. But you can’t completely rule out a hint at Jackson Hole next week.