FOMC Statement and Powell’s Press Conference

July 28, 2021

Aside from some inserted clarification regarding the timetable to tapering quantitative stimulus, little was changed in today’s FOMC statement.

The economy has made progress toward these goals [of  maximum employment and inflation rising to 2 percent and being on track to moderately exceed 2 percent for some time], and the Committee will continue to assess progress in coming meetings.

But as before, future tapering is tied to future actual and expected economic trends rather than pre-set dates. The above insertion merely confirms that the U.S. economy has evolved in such a way that the FOMC is closer to the onset of bond purchase reductions than it was at the time that this forward guidance was adopted, but officials do not specify how much closer. They have on several occasions before indicated that ample rhetorical lead time will be provided before tapering starts, so that market participants will not be surprised when  it happens.

My biggest takeaway in the description of the economy since the last FOMC meeting six weeks ago is that officials are sticking to the view that higher inflation now largely reflects transitory factors, but by including the qualifier “largely” are conceding that some of the upturn may be due to structural and enduring causes that will be watched closely.

The Committee members unanimously supported the majority view as they have done at earlier policy reviews this year.

There were a number of interesting revelations at the post-statement press conference.

  • The FOMC is now diving deeply into discussions about how best to undertake the tapering of asset purchases, but no firm decisions have been made. More time is needed to reach sufficient progress toward maximizing employment. A very broad range of indicators feed into this determination. Chairman Powell indicated that his FOMC colleagues think the U.S. economy is on the brink of a period of very strong growth in jobs but will want to be satisfied by future data that such  is so. They are disappointed that labor force participation continues to lag.
  • A strong distinction was made between tapering asset purchases and policy lift-off, which would be outright increases in the federal funds target. Lift-off remains quite some time away. Although Powell avoided any mention of timing, the sense was signaled that tapering could commence late this year or, if not then, in 2022.
  • On inflation, which will be much more influential driver of lift-off, Powell conceded that near-term risks are probably skewed to the upside. However, he stated the obvious distinction between higher prices, as being experienced now in certain areas like car rentals and prices, and price inflation. The former concerns the first derivative of prices, namely a directional change in level. Inflation involves the second derivative of prices, namely a quickening of their rate of increase. Here, officials are putting enormous weight on measured expectations of future inflation. Right now, such measures remained aligned with the Fed’s target of a 2.0% average yearly rate of rise. So long as such expectations stay anchored and so long as actual price increases remain heavily concentrated in a few areas hit hard by the pandemic, officials will continue to view inflation temporary. Powell cautioned that recent price hikes do not need to reverse. They merely need to stop climbing sharply once growing pains as supply bottlenecks fade. It thus appears that labor market data are most critical to decisions about tapering, while inflation will be the primary driver behind eventual interest rate decisions.
  • Powell noted that there is little support on the FOMC for cutting purchases of MBS-backed securities before trimming acquisitions of Treasuries.
  • The Committee’s thinking is that ensuing waves of Covid will continue to elicit diminishing repercussions on economic activity.

Market reaction: U.S. share prices initially dropped after the statement’s release but were trading close to pre-announcement levels shortly before today’s session closed. The ten-year Treasury yield fell two basis points additional after the announcement. The dollar lost some ground, and gold strengthened.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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