December 15, 2021 | 15:31
FOMC Policy Announcement — Taper Doubled as Inflation Troubled
As expected, the FOMC doubled its tapering pace to $30 billion per month beginning mid-January (Treasuries $20 billion vs. $10 billion, MBS $10 billion vs. $5 billion), owing to “inflation developments and the further improvement in the labor market”. This will end asset purchases by mid-March instead of mid-June, thus putting the Fed in a position to potentially raise policy rates by the spring instead of the summer. In the press conference, Chair Powell indicated that he didn’t foresee a long delay between the end of QE and the start of tightening.
The Statement's economic assessment said “job gains have been solid in recent months, and the unemployment rate has declined substantially. Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation.” The previous reference to the latter being ‘transitory’ was omitted, as was most of the verbiage concerning the inflation objective. The ‘new’ forward guidance is now: “With inflation having exceeded 2 percent for some time, the Committee 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.” Again, in the presser, Powell said the Fed expects to be at maximum employment next year given the rapid progress being made. And, he indicated that the Fed could still hike rates before reaching this objective.
The Statement also said: “Risks to the economic outlook remain, including from new variants of the virus.” The latter clause was new, in a nod to Omicron. But this doesn’t appear to be a pressing issue for the Fed at this point.
The Summary of Economic Projections (SEP) also emphasize Fed expectations for earlier tightening amid higher inflation, compared to September’s survey. In the ‘dot plot’, the median projection now has three full rate hikes in 2022, compared to only half of one before, with an additional 75 bps of tightening in 2023 (same as before) and 50 bps in 2024 (25 bps less than before). These peg the year-ending ranges for Fed funds at 0.75%-1.00% for next year, 1.50%-1.75% for 2023 and 2.00%-to-2.25% for 2024. The longer-run calls, both median and mean, didn’t change.
Elsewhere, the inflation projection was lifted. With October’s total and core PCE inflation rates already at 5.0% and 4.1%, respectively, the median projection has both averaging 0.3 ppts higher for the full quarter. Compared to September’s SEP, the former is 1.1 pts higher while the latter is up by 0.7 pts, and 2022’s median projection is 0.4 ppts higher for both (2.6% total, 2.7% core). And, 2023’s was upped by a tenth to 2.3% for both.
Bottom line: Early in December, we pulled forward our liftoff forecast by three months, with rate hikes beginning in June and continuing at a 25-bp-per-quarter pace. However, we still judge the net risks lie on the side of earlier liftoff and a quicker rate hike cadence. Considering today’s policy pronouncements, those net risks are weighing heavier, but only by a little at this point. The vagaries of the Delta and Omicron variants, how consumer confidence and outlays could react to a winter infection wave, and whether any restrictions occur all point to significant downside economic risks in the weeks and months ahead. Rates hikes are being teed up because of inflation, but the pandemic could still have a say on whether the Fed swings the tightening club in March, May or June.