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FOMC Preview: Taper Announcement Expected

by Calculated Risk on 10/31/2021 08:11:00 AM

Expectations are the FOMC will announce the tapering of assets purchases at the meeting this week.

From Goldman Sachs:

“The FOMC will announce the start of tapering next week, presumably at the $15bn per month pace noted in the September minutes. If implementation begins in mid-November, the last taper would come in June 2022. Large surprises on the virus, inflation, wage growth, or inflation expectations could prompt a revision, but we think the hurdle for a change in either direction is high.”

Analysts will also be looking for comments on inflation and possible rate hikes in 2022. Goldman Sachs now expects two rates hikes next year:

“We are pulling forward our forecast for the Fed’s first rate hike by one full year to July 2022, shortly after tapering is scheduled to conclude. We expect a second hike in November 2022 and two hikes per year after that.”
A key question will be if the “full employment” is still a criteria for the first rate hike.

Note: No projections will be released at this meeting. However, for review, here are the September FOMC projections.

Early Wall Street forecasts are for GDP to increase at a 5% to 6% annual rate in Q4 that would put Q4-over-Q4 at around 5.0% to 5.2% – so the FOMC projections for 2021 are now a little on the high side compared to Wall Street.

GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1
Projection Date 2021 2022 2023 2024
Sept 2021 5.8 to 6.0 3.4 to 4.5 2.2 to 2.5 2.0 to 2.2
June 2021 6.8 to 7.3 2.8 to 3.8 2.0 to 2.5

1 Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

Note that the unemployment rate doesn’t remotely capture the economic damage to the labor market. Not only are there 2 million more people currently unemployed than prior to the pandemic, over 3 million people have left the labor force since February 2020.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2
Projection Date 2021 2022 2023 2024
Sept 2021 4.6 to 4.8 3.6 to 4.0 3.3 to 3.7 3.3 to 3.6
June 2021 4.4 to 4.8 3.5 to 4.0 3.2 to 3.8

2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

The decline in the unemployment rate depends on both job growth, and the participation rate. A strong labor market will probably encourage people to return to the labor force, and the improvements in the unemployment rate might be slower than some expect.

As of September 2021, PCE inflation was up 4.4% from September 2020. This is just above the top end of the projected range for Q4.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1
Projection Date 2021 2022 2023 2024
Sept 2021 4.0 to 4.3 2.0 to 2.5 2.0 to 2.3 2.0 to 2.2
June 2021 3.1 to 3.5 1.9 to 2.3 2.0 to 2.2

PCE core inflation was up 3.6% in September year-over-year.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1
Projection Date 2021 2022 2023 2024
Sept 2021 3.6 to 3.8 2.0 to 2.5 2.0 to 2.3 2.0 to 2.2
June 2021 2.9 to 3.1 1.9 to 2.3 2.0 to 2.2

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