FOMC: Slower Expansion, Faster Inflation – Taper Soon with Rate Hikes to Follow
by Craig Dismuke, Dudley Carter
FOMC Prepares Markets for Taper, Raises Dots on Faster Inflation Projections: The FOMC voted unanimously at its September 21-22 meeting to keep its overnight target rate range unchanged at 0.00-0.25% and continue purchasing “at least” $120 billion in securities per month. While Fed officials chose to not act at this time, the Official Statement and Summary of Economic Projections, collectively, provide a warning that they expect to begin removing accommodation. The Official Statement noted that officials may taper asset purchases “soon.” The Summary of Economic Projections showed that policymakers have become sufficiently uncomfortable with their inflation expectations to respond with projected policy tightening in coming years.
Inflation Still Seen as “Transitory”: The Statement’s assessment of inflation was tweaked from saying “inflation has risen” to “inflation is elevated,” but continued to attribute this “largely” to “transitory factors.” Given that the SEP Forecasts show officials expect inflation to run above their 2% target through 2024, the definition of “transitory” is now longer than initially described.
Taper – November to Mid-2022: The Statement’s forward guidance language was changed from saying, “the Committee would be prepared to adjust the stance of monetary policy,” to saying, “the Committee judges that a moderation in the pace of asset purchase may soon be warranted.” With this change, the FOMC has now provided warning that a November taper is likely, barring any unexpected economic developments. In his post-meeting press conference, Fed Chair Powell indicated that, “So long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate.”
SEP – Slower Expansion, Faster Inflation: The Summary of Economic Projections reflected a downgrade in real GDP growth in 2021, an increase in short-term inflation expectations, a fractionally slower pace of labor recovery, and expectations for rate hikes in 2023 and 2024. The economy is now expected to expand 5.9% in 2021, down from 7.0% in the June projections. However, some of the lost 2021 growth was pushed into 2022 with the GDP forecast raised from 3.3% to 3.8%. Another factor dragging on real growth in 2021 was a higher inflation forecast. PCE inflation for 2021 was revised up from 3.4% to 4.2% while core was revised up from 3.0% to 3.7%. In addition to the higher short-term inflation expectations, 2022’s core PCE projection was revised up from 2.1% to 2.3%, 2023’s projection was revised up from 2.1% to 2.2%, and 2024’s initial projection showed core inflation of 2.1%.
Rate Projections: 50/50 on 2022, Three Hikes in 2023, Three More in 2024: In the context of these higher inflation expectations, the number of officials projecting liftoff to occur in 2022 grew from 7 to 9 (of 18 participants), implying a 50/50 chance for the first rate hike. Only one official now expects rates to remain at 0.00-0.25% through 2023 with the median dot raised to 1.00%, implying three rate hikes. In the first publication of the 2024 dots, the median dot of 1.75% implies another three hikes in 2024. Longer run rate projections were unchanged.