While there is no urgency, progress towards the FOMC’s targets continues to be made.
The July FOMC meeting communications kept to the themes and expectations of the June meeting. The Committee’s wording and tone suggests headway towards their maximum employment and price stability goals continues to be made; but, as put by Chair Powell in the press conference, there is “some ground to cover” before “substantial further progress” is achieved.
On the pursuit of full employment, indicators of “employment have continued to strengthen”, with the “sectors most adversely affected by the pandemic hav[ing] shown improvement”. Speaking on wages during the press conference, Chair Powell ascribed most of the wage gains to firms’ need to attract new hires in a supply-constrained environment, a temporary phenomenon, particularly in low-income professions. These observations re-enforce that full employment is not yet near and there is little-to-no enduring risk to inflation from pursuing further strong employment gains.
The inflation commentary in the statement was unchanged in July, with transitory factors seen as the driver of the recent above-target inflation outcomes. Chair Powell re-enforced this view in the press conference, making clear that the continuing overshoot on inflation has a re-opening narrative attached to it and is therefore transitory. He went on to make clear that, while he sees near-term inflation risks as skewed to the upside, into the medium-term those risks are expected to dissipate.
The above comments present the outlook in a positive light. While there is no urgency, it is apparent the FOMC is getting ready to announce a taper.
The statement clearly puts the decision on the current purchase pace in the past with the addition of “Last December, the Committee indicated that it would” to the sentence on the Treasury/MBS purchase programs. They also added, “Since then, the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings”.
Discussions on the form of the taper were also had at this meeting, specifically whether it was appropriate to taper MBS purchases before Treasury securities and/or to reduce MBS purchases at a faster pace given the strength of the US housing market.
Chair Powell has a similar view on this question to Westpac. He noted in the press conference that the effect of both purchase programs on financial conditions was more-or-less the same, making it appropriate to taper the programs together. However, some room was left to discuss further whether a faster taper pace was appropriate for MBS.
Chair Powell did not give anything away on the subject matter of his upcoming August speech at the Jackson Hole Symposium. It seems likely it will include a further exploration of the specifics of the taper process as well as how risks are to be assessed and responded to as policy is normalised. Arguably the FOMC will want to do all they can to avoid a protracted, uncertain tightening cycle.
Westpac continues to expect a taper announcement at the September FOMC meeting, with the process itself to begin in January 2022 and last for six months. All going well, rate hikes will commence in December 2022 and continue in 2023 and 2024, taking the fed funds rate to a peak of 1.625%. Throughout this process, GDP growth is anticipated to remain above trend, settling near that benchmark at the end of the period.
