WHAT TO WATCH:
- The minutes will be eyed for any suggestion that the Fed is on the cusp of signalling any intention to taper its USD 120bln of asset purchases in the near-term.
- Incoming inflation metrics (notably, the July CPI report – which the Fed would not have seen at its July meeting) generally conform to the 'transitory inflation' narrative, and some Fed officials have indicated a willingness to scale-back the rate of asset purchases.
- From a trader's perspective, the key questions are: the timing of the hint; the timing of an official announcement; the rate at which asset purchases will be tapered, and over what time scale; and any implications regarding the sequencing of asset purchases with potential rate hikes -- many desks have been using potential tapering timelines to inform their view on when rate lift-off will be, but should be cognizant of remarks from a few Fed officials that the two are separate debates; it is also worth noting that the meeting minutes will not resolve all of these questions, it will likely be many weeks before we have a firm gauge on all of them.
- Notable Fedwatcher Tim Duy has offered a potential timeline for the tapering process, and expects that the Fed will announce that it is on track to reach its 'substantial further progress' threshold at its September meeting, which lines up an official announcement in November (unless the data were to materially worsen), with tapering to follow shortly after. "The pace of tapering will depend on how the Fed views the risk of 2022 rate hikes, with more risk equalling a faster pace," and "this risk is pulling some weight toward a tapering announcement in September, in which case the signalling from Powell at Jackson Hole will be more direct."
- NOTE: The Jackson Hole Economic Symposium will take place 26-28th August.
FOMC JULY STATEMENT RECAP:
- LANGUAGE: The FOMC left rates unchanged, as expected, and there weren’t many wholesale changes to the statement. However, there were two new additions: the Fed now acknowledges that the “economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings," but the Fed does not appear to think that the ‘substantial further progress’ threshold has been met, noting that “the sectors most adversely affected by the pandemic have shown improvement but have not fully recovered".
- PANDEMIC: The recent delta concerns by market participants do not seem to be reflected in any statement language change, and therefore, this should support the expectation that the Fed will likely make an explicit ‘taper is coming’ signal at the Jackson Hole Symposium at the end of August, followed by an announcement in Q4 (September is clearly in play), before implementing the scaling back of asset purchases early 2022. On the health crisis, the Fed removed the line that sectors affected by the pandemic "remain weak but have shown improvement" replacing that with "sectors most affected by the pandemic have shown improvement but have not fully recovered" which suggests that the recent delta variant fears have not forced the Fed to revise its outlook for growth lower just yet.
- REPO: Elsewhere, the Fed finally launched its standing repo facility, as has been heavily alluded to, but likely will not be used until money market rates begin rising towards the top-end of the Federal Funds target range - the Fed is facing the opposite problem currently with the surge in the Reverse Repo Facility demand.
CHAIR POWELL POST-MEETING PRESS CONFERENCE RECAP:
- TAPERING: On tapering, the Fed chair was asked if the statement tweaks were part of the advance notice on taper, but repeated that we have not reached substantial further progress. On the rate of asset purchases, Powell suggested that the current pace of purchases remains appropriate until 'substantial further progress' has been met, repeating that the timing of the taper will depend on incoming data, and reiterated that the Fed will provide advance notice before any change. Later, Powell said that the Fed has not made any decision about the timing of the taper but did note he expects further progress to be made. The Fed chair did however offer some insight into the configuration of how the taper will be carried out, stating that it was likely that both MBS and Treasury purchases will be tapered at the same time (some were calling for MBS to be tapered more quickly on account of the 'heat' in the housing market).
- LABOUR MARKET: Powell reinforced the message that substantial further progress has not yet been made, stating that the labour market still has a "ways to go" while pandemic factors appear to be weighing on employment growth, but should wane in the "coming months". Powell said there was still "some ground to cover" on substantial further progress. Powell is hopeful that the Fed can make good progress towards full employment over the next couple of years (note: this is consistent with the Fed's recent forecasts which pencil in an unemployment rate of 3.5% in 2023). But said it should not take long to reach a strong labour market.
- INFLATION: Powell continues to frame inflation as transitory, and will remain elevated in the coming months before moderating, but added that inflation could turn out to be higher, more persistent than expected. Powell provided the usual caveats that the Fed would use tools to guide inflation lower if there was an extended period of high inflation.
- PANDEMIC: Powell also said that continued progress on vaccinations would help support the return to more normal economic conditions. On the delta strain, Powell noted that there has been fewer implications from each wave and didn't tout much concerns on the economic front from the Delta variant, as some analysts had warned Powell might beforehand.
- RATES: On rates, Powell suggested that the Fed is still a ways away from considering lifting rates. There was a small hint on sequencing, with the Fed chair suggesting that ideally the central bank would not raise rates before the taper has concluded.