September 22nd FOMC Follow-Up

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Rates

  • As expected, the FOMC unanimously voted to keep the Fed Funds target rate unchanged within the 0.00% to 0.25% range.
  • In their updated Summary of Economic Projections, half of the 18 officials indicated an expectation for higher rates by the end of 2022 and all but one official expect higher rates by the end of 2023.
  • In his opening statement of the Press Conference, Chairman Powell stated that the timing and pace of tapering asset purchases is not intended to directly signal the timing of interest rate liftoff which will have a “substantially more stringent test.”

Monetary Policy Implementation

  • In an update to the language regarding asset purchases, the FOMC Statement noted that “If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.”
  • In the Press Conference, Chairman Powell clarified that the language of “soon” means that tapering could begin as soon as November as the tests for “substantial further progress” have been met for inflation and “all but met” for employment.
  • While no decisions were made regarding the pace of tapering, the Committee indicated that so long as the economic recovery continues to progress, a gradual tapering that concludes around the middle of next year is likely appropriate.
  • Until the aforementioned tapering is announced, the Fed balance sheet purchases of Treasuries and agency mortgage-backed securities will continue at the same monthly rate of $80 billion and $40 billion respectively.

Economic Conditions

  • Chairman Powell noted in his opening statement that the first half of the year saw “robust” real GDP growth of 6.4 percent. While growth is widely expected to continue at a strong pace in the second half of the year, forecasts from FOMC participants have been revised lower from their June estimates due to supply constraints and the virus.
  • The FOMC statement included new language that noted while the sectors most heavily affected by the pandemic have improved, “the rise in COVID-19 cases has slowed their recovery.”
  • Language in the FOMC Statement was updated to say that inflation is elevated, and Chairman Powell noted in his opening statement that the bottleneck effects have been “larger and longer-lasting than anticipated.” While these effects are prominent, the Committee believes they will abate which will bring inflation back towards their longer term goal.

The FOMC is next scheduled to meet November 2 – 3, 2021.

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