The Federal Reserve (Fed) ended its two-day Federal Open Market Committee (FOMC) meeting yesterday and, as expected, there were no changes to current interest rate or bond purchasing policies. However, the Fed continues to prepare the market for a reduction (taper) of bond purchases. In the statement released shortly after the conclusion of the meeting, it was noted that a “moderation in the pace of asset purchases may soon be warranted”. Additionally, during the press conference, Chairman Jerome Powell mentioned that, “while no decision has been made, the Committee currently believes tapering would likely conclude around mid-2022”. These statements are in line with our expectations and we continue to think plans to taper are likely to be announced in November with the actual reduction in bond purchases taking place in December.
“This meeting will likely be perceived as slightly hawkish,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “However, we would characterize it as slightly less dovish. We still think the Fed will continue to provide monetary support to the economy for a few more years.”
Interestingly, the signaling on the future path of monetary policy continues to show the wide divergence of opinions on the committee. As shown in the LPL Research Chart of the Day highlighting the Fed “Dot Plot,” individual members believe short-term interest rates could be anywhere from zero to over 1.5% in 2023. Also of note, nine (out of eighteen) officials believe at least one interest rate hike is warranted next year. While these dot plot projections are not official policy, it does show that there is a noticeable split between the doves and hawks on the Committee. As such, the future make-up of the committee and whether Powell is reappointed or not will likely have a notable impact on the future of monetary policy. We are likely to hear from the Biden administration in the next few months on how, if at all, they could reshape the Committee.
Also of note, four times a year, the Fed updates its economic projections for the next several years as well its longer-term forecasts. The influence of supply chain bottlenecks and the delta variant have clearly influenced how the Fed sees inflation and GDP growth, respectively, for the remainder of the year. The Fed now sees 5.9% GDP Growth in 2021 (down from 7.0% in June), and much higher inflation expectations with PCE headline and core metrics, their preferred inflation measures, at 4.2% and 3.7% (up from 3.4% and 3.0% in June), respectively. However, the committee sees inflation falling slightly in 2022 and a pick-up in economic growth for the year as well.
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