Are We There Yet?

It's the question that parents around the world know all too well, "Are we there yet?" That was the key question coming into today's Fed meetings. The answer? Not yet, but we're getting closer.

Although the Fed made no changes to the stance of monetary policy, it did insert language in the statement saying it will continue to assess the economy's progress "in coming meetings." This language was inserted immediately after language on the pace of quantitative easing (QE). This is a strong signal that unless something unexpected happens that the Fed will announce a tapering of QE in the fourth quarter, or possibly as early as the September meeting. We expect tapering to start by January 2022 and that the Fed will stop expending its balance sheet at all by the end of 2022. In the meantime, the Fed will keep buying a total of $120 billion in Treasury and mortgage securities per month.



As far as raising short-term interest rates is concerned, don't hold your breath. The Fed continues to acknowledge recent higher inflation but dismiss its staying power. In addition, although recognizing that a higher short-term interest rate is a theoretical possibility before tapering is done, Powell, at the post-statement press conference said it was unlikely.

Is the Delta variant a concern that has the Fed holding back? Not according to Powell. While the Fed will certainly watch the data for signs of disruption, he noted that subsequent waves of COVID have had more muted impacts on economic growth. In fact, U.S. activity during the summer and winter waves of last year comfortably outperformed the Fed's expectations, and that was before vaccinations took off here in the U.S. As such, there is little expectation that the Delta wave will notably shift the economy's path in the coming months.

The September meeting should be much more lively, with two more jobs reports to come between now and then, as well as the roll-off of extended unemployment benefits that are scheduled to end nationally on September 6th. If India and the U.K are any indicator, we are likely to be on the tail-end of (or past) the Delta wave. Barring a downside surprise, expect even stronger hints about tapering at the September meeting. Rate hikes are still a long way off, but this would be the first step towards normalizing exceptionally accommodative monetary policy.