Fed hints at monetary stimulus wind-down sooner rather than later

August 27, 2021

Bruce Harris

Head of Global Fixed Income Strategy

Steven Wieting

Chief Investment Strategist & Chief Economist

SUMMARY

The Fed’s recently revealed stance was dovish, but only by a few months, as it likely pushed the formal taper announcement from September to November as the US central bank awaits more data.

The Fed held its Jackson Hole Economic Policy Symposium, entitled “Macroeconomic Policy in an Uneven Economy” last week. The most important speech was by Chairman Powell, when he delivered opening remarks to kick-off the event.
Markets had anticipated this speech for months now in expectation of getting a signal about the start date of a gradual reduction, or “taper”, of the Fed’s $120 billion in net new monthly Treasury and MBS purchases, known as Quantitative Easing, or “QE”.
Powell signaled that a formal taper announcement will occur this year, but he left the formal announcement date open, saying that it “could be appropriate to begin tapering this year”.
Powell agreed with other FOMC members on inflation, stating that the “substantial further progress test met for inflation”, though he thinks inflation is mostly transitory, and reckons more time is needed to judge whether the labor market has fully recovered, saying “much ground to cover to reach maximum employment” (in part due to risks of the COVID-19 Delta variant). Powell also indicated that the timing of rate hikes is not necessarily dependent on the tapering timeline.
This was a somewhat dovish speech, but only by a few months, as it likely pushed the formal taper announcement from September to November as the Fed awaits more data, with the actual taper itself probably starting in December or January.
Market consensus is still for $15 billion reduction of purchases each month, resulting in an 8 month timeline to end-of-taper (ending in roughly July or August 2022).
This timeline can of course be halted or adjusted (or even reversed) given the Fed’s data-dependent approach, but barring a significant change in the economic trajectory and given the Fed’s propensity to warn the market well in advance of major policy changes, we think this pace would be maintained if possible (COVID-19 impacts being the principal wildcard, as noted by Powell).
Once the Fed has finished its taper, it is likely to wait some amount of time before it then embarks on raising the Fed Funds policy rate just to make sure that the economy has not slowed down.