Fed Meeting — September 22, 2021
22 September 2021
The two-day FOMC meeting concluded this afternoon. As expected, the Fed kept short term rates unchanged. The Committee updated its press release to state that “a moderation in the pace of asset purchases may soon be warranted.” This “tapering” of the Fed’s program of buying Treasury and mortgage securities purchases has been hinted at for months. The program has purchased $120 billion per month of bonds over the last year, growing the Fed’s balance sheet and keeping a lid on interest rates.
The Fed is watching employment and inflation to guide its decision as to when to reduce its bond purchases. Inflation has exceeded the Fed’s 2% target for a number of months and the Fed is comfortable with current levels. September’s job report, surveyed the week of the 12th , will be released October 8th. The next two Fed meetings are November 2-3 and December 14-15. If the September jobs report has a big jump over the last several months’ average of 570,000, then there is a high probability the Fed will proceed and announce a tapering schedule.
The Committee press release indicated that the economy has slowed somewhat thanks to the delta variant. Inflation is “elevated” due to transitory effects. Heeding the short-term effects of the variant, the Committee lowered 2021 GDP outlook to 5.9% from 7%. It also forecasts inflation holding above 4% for the rest of the year, versus 3.4% in their June report.
We do raise our eyebrows a bit at the “transitory” inflation stance by the Committee. Forecasting 4% for the full year and a very optimistic 2.2% for 2022 may be a bit too rosy. Food increases are just now making their way into consumer prices and housing increases are coming. Shortages in just about every product are projected to continue into next year. Instead of “lower for longer” we may have “less for longer” while “paying more for longer.”
The Committee members’ rate expectations, called the “dot plot,” shows that half of the group thinks that short-term rates will rise for the first time in 2022. The Fed had been firm earlier in the year that there would be no increases until 2024.
The current FOMC leadership has done an admirable job of telegraphing its policy moves and being deliberate about implementing them. That they are one step closer to reducing bond purchases and recognizing a strong economy may require slightly higher interest rates is thus no surprise. At this writing markets are taking the news in stride.
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