The minutes from the September 21-22, 2021 Federal Open Market Committee (FOMC) meeting showed that members view that the economy remains on track even with some slowing in economic activity.
The members of the Committee noted that “economic activity had continued to expand in recent months, though at a less rapid pace than in the first half of the year.” While this weighed on the outlook for growth over 2021, members acknowledged “that the economy had shown resilience in the face of the recent wave of infections.”
FOMC members marked up their inflation forecasts as “they assessed that supply constraints in product and labor markets were larger and likely to be longer lasting than previously anticipated.”
On the balance sheet, Fed members have been looking to see if the requirement of “substantial further progress” has been reached. Though most think that the requirement for the price stability objective had been reached, “a number of participants assessed that the standard of substantial further progress toward the goal of maximum employment had not yet been attained.”
Though nothing was decided on asset purchases at this meeting, most members agreed that a taper may soon be warranted. They also commented that a proposed template for the path of tapering wherein “monthly reductions in the pace of asset purchases, by $10 billion in the case of Treasury securities and $5 billion in the case of agency mortgage-backed securities (MBS)” would be appropriate when the time for tapering arrived (as early as mid-November).
Key Implications
The Fed is getting closer to a taper announcement. From our lens, the economy is bouncing back from a Delta variant slowdown and is poised to accelerate in the coming months. The Fed has recognized this and is getting more confident that it can pull back on some of its monetary support.
With the price of energy, food, and a host of other products rising fast, inflation continues to exceed expectations. Many Fed members are now starting to admit that ‘transitory’ inflation is going to last longer than they previously thought. The pressure on the Fed is starting to build and the Fed has responded by bringing forward the expectation for the start of rate hikes to 2022.
Bond yields have started to move and reflect a tighter policy stance from the Fed. We have seen a significant move in long-term Treasuries since August, with the U.S. 10-year jumping from around 1.2% to a high of 1.6%. Tighter monetary policy is on the horizon. With a taper announcement coming and rate hikes getting closer, yields should continue to march higher.
