Economic Flash

FOMC Begins Tapering Process, Hedges Outlook for Inflation

by Craig Dismuke, Dudley Carter

FOMC Begins Tapering Process, Hedges Outlook for Inflation

As was widely expected, the Fed voted unanimously to keep its target interest rates unchanged but to begin the process of slowing its monthly asset purchases.

After growing its balance sheet from $4.1t to $8.4t since the onset of the pandemic, the Fed announced that it will begin slowing its $120b in monthly purchases by $15b per month beginning this month. Monthly Treasury purchases will initially be slowed from $80b to $70b and MBS purchases from $40b to $35b.  In December, purchases will be slowed to $60b and $30b, respectively.  If the $15b per month taper continues on auto-pilot, purchases will conclude in June 2022 with the balance sheet at $8.8t. The Official Statement provides policymakers with flexibility, noting that the Committee “is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.”

The persistence of higher-than-expected inflation led officials to provide a slightly less certain inflation assessment in the Official Statement.  The previous Statement noted that “Inflation is elevated, largely reflecting transitory factors.”  This was changed to say, “Inflation is elevated, largely reflecting factors that are expected to be transitory” (emphasis added).  However, while the Committee is less certain, they continue to believe it will prove transitory.

As it relates to the supply chain challenges, the Statement notes that “an easing of supply chain constraints [is] expected to support continued gains in economic activity.”

With the taper process now announced, attention will turn to when the first hike may occur and how much the Fed will be able to raise its target interest rates. Fed Funds Futures currently project greater than a 50/50 chance of the first rate hike occurring by mid-2022.