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Sunday, September 19, 2021

FOMC Preview: Tapering "Advance Notice" Likely

by Calculated Risk on 9/19/2021 11:20:00 AM

Expectations are there will be no change to rate policy when the FOMC meets on Tuesday and Wednesday this week.  However, there is an expectation that the FOMC will make it clear that they intend to start the tapering of asset purchases soon.

Here are some comments from Goldman Sachs economists on the timing of tapering:

The FOMC is likely to provide the promised “advance notice” that tapering is coming at its September meeting, paving the way to announce the start of tapering at its November meeting. Specifically, we expect the September FOMC statement to say something along the lines of, “The Committee expects to begin reducing the pace of its asset purchases relatively soon, provided that the economy evolves broadly as anticipated.”
Analysts will also be looking for comments on inflation, although the Fed is probably not overly concerned with inflation right now. Some of the recent increase in inflation was due to base effects (prices declined at the beginning of the pandemic), and some probably due to transitory effects related to supply bottlenecks.  However, the recent surge in COVID cases has probably extended the supply chain disruptions, and there is growing concern that rising rents will spill through to Owners' Equivalent Rent (OER) - a large component of CPI and PCE prices - and push up PCE inflation in 2022.

Updated projections will be released at this meeting.  For review, here are the June FOMC projections.

Wall Street forecasts were for GDP to increase at a 8.6% annual rate in Q2 (came in at 6.6%) and forecasts for Q3 have been downgraded recently.  So the FOMC GDP projections are now too high and will likely be revised back down to around the March projection range for 2021.

GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1
Projection Date202120222023
June 20216.8 to 7.32.8 to 3.82.0 to 2.5
Mar 20215.8 to 6.63.0 to 3.82.0 to 2.5
1 Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

Note that the unemployment rate doesn't capture the economic damage to the labor market.  Not only are there 2.7 million more people currently unemployed than prior to the pandemic, over 2.9 million people have left the labor force since February 2020.  And millions more were being supported by various provisions of the disaster relief acts.

Any change to the June unemployment rate projections will probably be minor.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2
Projection Date202120222023
June 20214.4 to 4.83.5 to 4.03.2 to 3.8
Mar 20214.2 to 4.73.6 to 4.03.2 to 3.8
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of July 2021, PCE inflation was up 4.2% from July 2020.   Projections for PCE inflation in 2021 will be revised up closer to 4%. 

Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1
Projection Date202120222023
June 20213.1 to 3.51.9 to 2.32.0 to 2.2
Mar 20212.2 to 2.41.8 to 2.12.0 to 2.2

PCE core inflation was up 3.6% in July year-over-year.   Core PCE inflation projections for 2021 will also be revised up.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1
Projection Date202120222023
June 20212.9 to 3.11.9 to 2.32.0 to 2.2
Mar 20212.0 to 2.31.9 to 2.12.0 to 2.2