The FOMC statement shows that the Fed will taper now unless a major economic shock spreads and disrupts business. In fact, there is a possibility of increasing interest rates in 2022 depending on economic success or the pace of inflation, time will tell whether the mainstay of this is the success of economic recovery or the fear of inflation. Compared to the Bank's June dot plot estimates, the center of gravity now shifts the median to 2022 rather than 2023, suggesting that hawkish tandance is on the rise.
· If progress continues broadly as expected, the Committee may decide that a moderation in the pace of asset purchases may soon be warranted.
· We expect to keep the funds rate close to zero until labor market conditions reach levels consistent with the committee's maximum employment assessments.
· The sectors most adversely affected by the pandemic have recovered in recent months, but the rise in COVID-19 cases has slowed their recovery. Inflation is high, largely reflecting temporary factors.
Now, let's look at the asset purchases, interest rates and economic projections, which are as important as the monetary policy statement. The FOMC has decided to keep the target range for the benchmark policy rate at zero to 0.25% and to continue its Treasury and mortgage-backed securities purchases at a rate of $120 billion per month. Projections for 2024 have also been released for the first time, with the median suggesting a 1.8% federal funds rate by the end of that year. The 2023 median increased from 0.6% in the June projection to 1% in the September projection. The Fed also said it will double the limit for the one-night reverse repo facility per counterparty to $160 billion per day. If growth and inflation are at the focal point; slower growth as we expected (Covid, Evergrande, financial stress, global slowdown) and higher inflation expectations.
According to the Fed's preferred PCE benchmark, inflation is expected to be 4.2% in 2021, compared to 3.4% in the June FOMC. Regarding the following years; There are 2.2% expectations for 2022 and 2023 and 2% expectations in the longer term, which may remain above the target even when temporary factors pass, due to the ability of the cost factors fed by inflation to continue. In the core, too, the revision was made significantly upwards from 3% to 3.7% for this year. While many Fed officials said they expected it to return to 2% once temporary supply chain disruptions from the pandemic are resolved, some cited rapid price increases as a reason to start raising rates as early as next year. On the growth side; revised from 7% to 5.9% this year, but subsequently increased from 3.3% to 3.8% in 2022 and from 2.4% to 2.5% in 2023.
We see that unemployment has moderated a little more than the previous forecasts of the Fed. The forecasts, which were increased from 4.5% to 4.8% for this year, remained at 3.8% and 3.5%, respectively, for the following years. The unemployment rate in the US fell to 5.2% in August, well below the April 2020 peak of 14.8%, but still above the 3.5% rate in February 2020.
Economic projections of Federal Reserve Board members and Fed chairmen under their individual assumptions regarding anticipated appropriate monetary policy, September 2021… Source: Federal Reserve, Bloomberg
As for the federal funds rate, the movements of the dots indicate that some members are also shifting to the 2022 side. These expectations may change periodically, for example, if Evergrande at the December meeting or new findings on the extent of the global recession risk are evaluated, there is a possibility that this time frame will slip again. However, the center of gravity shift will tapering unless there is a huge negative impact, and while the tapering continues, the Fed's liquidity base will still be sufficiently supportive of the economy. A tapering at a gradual pace, where the market will not experience a funding squeeze, will be the most desired phenomenon at this stage. Because the Fed's holding back is not because of the motivation to continue to support the market from now on; may occur in an environment where it sees serious financial and economic risks. In other words, the global economic perception needs to be weakened a lot, and no actor in the economy will want to enter this cycle in terms of sustainability at the stage of exiting the Covid crisis. The Fed is leading the transition and tapering is coming.
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