Fed: Tapering to start in mid-November or mid-December

Minutes of the September 21-22 FOMC meeting released yesterday revealed that there is broad consensus that they should start reducing emergency pandemic support for the economy in mid-November or mid-December, even as the delta variant continues to generate headwinds. As the prominent details in the meeting minutes;

 

·        Respondents generally considered that a gradual contraction period ending in mid-next year would be appropriate, provided the economic recovery generally goes well.

·        Participants noted that if a decision is made to start reducing purchases at the next meeting, the reduction process can begin with monthly purchasing schedules starting in mid-November or mid-December.

 

Fed officials signaled at their meeting last month that they were close to reducing their monthly asset purchases of $120 billion. In this context, Powell’s statements were that the process could start in November and probably end in mid-2022. We see that this calendar is laid out in clearer details in the minutes, technically it doesn’t make much difference to start reducing the slices in November or December. However, the end of asset purchases in the summer of 2022 increases the likelihood of an rate hike to occur on or near September 2022. Price stability uncertainty is an important point and will underpin it. The drawback is that there is a similarly high uncertainty in employment.

 

Inflation is rising at its fastest pace in recent years, well above the Fed’s 2% target. According to the data released yesterday, consumer prices increased by 5.4% in September compared to the previous year. Some officials say supply bottlenecks and production disruptions, which have been disrupted by the reopening of the economy from the pandemic, could sustain price pressures longer than they expected. Last month, Fed officials predicted that price pressures would decline near their targets for next year. However, the number of members waiting for an interest increase in 2022 was 9 out of 18, and 2 more people were added to the 7 people in June. The FOMC’s mandate is to keep rates near zero until the labor market reaches maximum employment and inflation is on track to exceed 2% “for a time”. In other words, if the Fed takes the rate hike more seriously, there will also be significant economic progress.

 

Therefore, we observe a Fed close to the hawkish tone of the September meeting in the minutes. Following a hawkish meeting where bond-buying was said to be ‘soon’, these minutes reveal clues to the precise timing of the Fed withdrawing stimulus and, to a lesser extent, tilting towards a first rate hike. We still continue to attach importance to the economic success criterion for an interest rate hike in 2022. The updated inflation concerns, on the other hand, raise the possibility of a November meeting on the tapering start.

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