The meeting Powell didn’t want to have

The meeting Powell didn’t want to have

How tempting it would be to title this article: “Thinking about thinking about…. Tapering”. As soon as Powell mentioned the phrase it was always going to be jumped on by the market.

 

Wednesday’s FOMC meeting was already done before the press conference started. The dot revisions (where the committee provides its forecast for future interest rates) was revised up more than expected. The 2022 median remained unchanged, but seven members now expect rates to rise next year, and the median for 2023 now shows two rate hikes. Powell was then left to sell the transitory inflation message at the press conference, with the backdrop of a committee that has followed the recent transitory inflation prints and put the dots up. Clearly, not everyone believes in the message!

 

In terms of the sequencing, the important part is that Powell stressed that the policy tool for now is asset purchases, so rate changes are not on the cards until after this. He also mentioned on a couple of occasions that the committee expects the labour market to be very strong in the future. Given that the policy framework is set to react to “substantial further progress”, this is effectively saying that asset purchase tapering is on the cards in the near future.

 

When you line up tapering with the dot plot, using the above logic, then we could see asset purchases starting to taper late summer and then lasting until late 2022, when the FOMC could start to discuss raising rates. The July meeting and Jackson Hole are back on the table!

Nick Chatters

Investment Manager, Fixed Income

Nicholas Chatters is an investment manager in the Fixed Income team and specialises in interest rate derivatives and relative value investment.

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