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The Meeting We’ve All Been Waiting For

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The Meeting We’ve All Been Waiting For

ByJin Dao Tai

 SEP 30, 2021

The Meeting We’ve All Been Waiting For


During the Jackson Hole Symposium back in August, Federal Reserve Chairman Jerome Powell highlighted the possibility of a quantitative easing (QE) tapering before the end of this year. Last week, Powell reiterated that possibility with a stronger conviction during the central bank’s monetary policy meeting.

Building up the tapering crescendo.

First off, as widely expected, the Fed held its interest rates unchanged at the target range of 0-0.25% and kept QE unchanged at the rate of $120 billion per month. Like in previous statements, the central bank committee continues to acknowledge the progress made in the economy towards its maximum employment and price stability goals. However, the difference is that in the current statement, the Fed assured that if progress towards the goals “continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted”.

This indicates that QE tapering may very well be announced during the November’s meeting on the condition that the jobs and inflation report to be released for the next two months continue to progress as expected. Although no detail on the planned amount of QE to be tapered was provided, Powell did highlight during the press conference that the committee members expect QE tapering to end around mid-2022 “as long as the recovery remains on track”.

“Substantial further progress” test for inflation and employment.

Powell went on to elaborate on the progress made towards inflation and employment. On inflation, the Chairman said that the recent significant progress which led to the rise in prices has convinced many of the committee members including himself that the “substantial further progress” test has been met. In fact, it has exceeded their expectation.

As for employment, Powell believes that the job market is close to clearing the test while also highlighting that many of the committee members felt that the test has been cleared. While some market participants may be wondering how well should future job figures be for the test to be cleared, the Chairman clarified that he is not expecting a stellar figure from future jobs report and that a “reasonably good employment report” will be sufficient.

More upbeat from the projection materials.

Adding on to the hawkish tone, the Fed’s quarterly released dot plot shows that 9 out of 18 committee members projected interest rate to be increased in 2022, up from the previous 7 members back in June’s projection. Furthermore, the projection for 2023 underwent a big revision with only 1 member expecting interest rate to remain unchanged at current level as opposed to the previous 5 members.

The economic projections for 2021 was impacted by the spike in COVID cases when it started back in July. Economic growth has been revised downwards to 5.9% from the June’s projection of 7.0% while unemployment rate has been revised upwards to 4.8% from the previous 4.5%. The highly contagious Delta variant has led to a new wave of lockdown in the U.S., leading to the negative impact on the economy and the job market. Nonetheless, headline inflation for 2021 has been revised upwards from 3.0% to 3.7% with the recent months of rising prices and has also been revised upwards by 0.1% for 2022 and no change for 2023. In the medium term (2022 and 2023), economic growth is projected to be higher than in previous forecast while unemployment rate remains unchanged.

Overall, this set of projection materials portrayed a highly hawkish tone from the Fed.

When can we expect a tapering announcement?

With the hawkish conclusion of this meeting, the market is now expecting a QE tapering announcement to be made during the November’s meeting. The Fed will be paying close attention to the next two releases of the jobs report. With the committee members agreeing that the “substantial further progress” test is close to being met for employment, two decent jobs report are all the central bank need right now to make the long-awaited announcement.

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