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FOMC: Cometh November!

By Madhavi Arora

The Fed strongly hinted that tapering down of asset purchases "may soon be warranted," provided progress toward its inflation and labor market goals continues." Powell was more explicit in his presser that soon could mean the next meeting in November.


While this was expected, modestly surprising was Powell in his presser indicated the Committee's intention to conclude asset purchases around the middle of next year.

FOMC: Cometh November!

Chair Powell noted some FOMC participants think the "substantial further progress" criteria has already been met, while he characterized conditions in the labor market as having "all but met" his own view of this criteria. He also stressed that the Fed could adjust the pace of tapering as needed, but that tapering would likely be sped up if it looked like conditions warranted hiking sooner than currently expected.

We had expected a per-meeting reduction in the monthly purchase pace of $10bn for Treasuries and $5bnn for mortgages which would have concluded asset purchases next fall. But a Mid-year conclusion of taper means either:

(a) they have a larger per-meeting reduction in mind, or perhaps


(b) they trim purchases every month instead of every meeting.

The other major development was the interest rate forecast "dots," where the FOMC is now evenly split between hiking and holding by the end of 2022, and the median dot remains divided between 3 and 4 hikes cumulative by end-2023 and 6 to 7 hikes in total by end-2024.

Powell however stressed that the conditions for lift-off are more stringent than those for tapering, and that the timing of the latter has no direct signal for the former.

The FOMC also sees higher inflation and a somewhat less robust recovery than it did in June, with a touch more inflation overshooting across the forecast horizon.

Powell continued to argue that elevated inflation was largely due to transitory factors that would fade by next year, and that longer-term inflation expectations remain broadly consistent with Fed's goals.

Markets seem to have weathered Fed's forward notice on tapering as equity indices climbed, and late USD rally belied risk-asset recovery.

Next up, markets are watching for US fiscal policy, where two deadlines are looming.

Congress needs to pass a continuing resolution in lieu of a budget by September 30 to avoid a government shutdown. In addition, it needs to address the debt limit before the Treasury's extraordinary measures are exhausted sometime in October to preclude a default.

We maintain Treasuries appear dislocated from fundamentals . The Catalysts such as labor market tightening, higher supply or a renewed push for the bipartisan infrastructure package may be needed to push yields higher.

(The author, Madhavi Arora, is Lead Economist, Emkay Global Financial Services)

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