Financial markets got some clarity on the direction of monetary policy on Wednesday afternoon, following the release of the minutes of the September FOMC meeting.
Although tapering will begin in mid-November or mid-December, it will be gradual, and isn’t a signal for interest rate tightening. (See Insiders’ Hot Stocks on TipRanks)
Tapering to Begin Soon
In the press release that followed the September FOMC meeting, the Fed announced that tapering, the rolling back of the Fed’s bond-buying program, will begin soon. Now, we know it will be mid-November or mid-December.
Here’s a quote from the FOMC minutes:
“Regarding the outlook for monetary policy, market participants noted policymaker communications suggesting that tapering of asset purchases could begin this year and end by mid-2022.
“Around half of respondents to the Desk’s surveys of primary dealers and market participants viewed December as the most likely timing of the first reduction in the net pace of purchases, although respondents also attached significant probability to the first reduction coming in November.”
Tapering Will Be Gradual
Meanwhile, the Fed reiterated that tapering will be gradual, and completed by the middle of 2022.
Here’s another quote from the FOMC minutes:
“Median expectations for the pace of net purchases were consistent with a gradual tapering of net purchases being completed in July of next year, about one to two months earlier than in the previous surveys.”
Tapering No Signal for Tightening
While tapering will be gradual and end by the middle of the following year, it wouldn’t signal the beginning of tightening, the rise of short-term interest rates.
Here’s a third quote from the FOMC minutes:
“All members agreed to keep the target range for the federal funds rate at 0 to ¼ percent, and they expected that it would be appropriate to maintain this target range until labor market conditions had reached levels consistent with the Committee’s assessments of maximum employment and inflation had risen to 2 percent and is on track to moderately exceed 2 percent for some time.”
The trouble is that recent inflation numbers suggest that inflation is already running well above the Fed’s 2% target, without signs of easing.
For instance, according to the U.S. Bureau of Labor Statistics, inflation rose at an annual rate of 5.4% in September. That’s slightly higher than the August number, and ahead of market expectations.
Inflation expectations, which measure future inflation, are also running above 5%.
Bottom Line
Inflation may force the Fed to tighten sooner than later.
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