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FOMC Preview: Probably Too Soon for Hints on Tapering

by Calculated Risk on 7/25/2021 07:59:00 AM

Expectations are there will be no change to rate policy when the FOMC meets on Tuesday and Wednesday this week.

Analysts will be looking for any hints as to when the Fed will start to taper asset purchases, although it is probably too early – especially given possible economic downside risks due to the resurgence in COVID cases – for the Fed to drop hints on tapering this week.

Here are some comments from Goldman Sachs economists on the timing of tapering:

Fed officials have said that they intend to signal that tapering is coming “well in advance,” a phrase they also used in reference to the start of balance sheet runoff in 2017. That precedent suggests that “well in advance” means two meetings worth of hints before the formal announcement, consistent with our expectation of a first hint in September, a second hint in November, and a formal announcement of tapering in December.

Analysts will also be looking for comments on inflation, although the Fed is probably not too concerned with inflation right now. Some of the recent increase in inflation was due to base effects (prices declined at the beginning of the pandemic), and some probably due to transitory effects related to supply bottlenecks.

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

Wall Street forecasts are for GDP to increase at a 8.6% annual rate in Q2 (to be released this coming Thursday). This is lower than most forecasts when the Fed last met in June.

So the FOMC projections for 2021 may now be a little on the high side compared to Wall Street.

GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1Projection Date202120222023June 20216.8 to 7.32.8 to 3.82.0 to 2.5Mar 20215.8 to 6.63.0 to 3.82.0 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 3.7 million more people currently unemployed than prior to the pandemic, over 3.4 million people have left the labor force since February 2020. And millions more are being supported by various provisions of the disaster relief acts.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2Projection Date202120222023June 20214.4 to 4.83.5 to 4.03.2 to 3.8Mar 20214.2 to 4.73.6 to 4.03.2 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 May 2021, PCE inflation was up 3.9% from May 2020.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1Projection Date202120222023June 20213.1 to 3.51.9 to 2.32.0 to 2.2Mar 20212.2 to 2.41.8 to 2.12.0 to 2.2

PCE core inflation was up 3.4% in May year-over-year.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1Projection Date202120222023June 20212.9 to 3.11.9 to 2.32.0 to 2.2Mar 20212.0 to 2.31.9 to 2.12.0 to 2.2

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