Fed research review: Another step towards less accommodative monetary policy

Key takeaways

• Like in June, the Fed was more hawkish than anticipated at the July meeting. The Fed now says that "the economy has made progress towards" the goals and that the Fed "will continue to assess progress in coming meetings". It was one of the interim meetings without updated projections and new dots.
• The Fed repeats that high inflation is "largely reflecting transitory factors" (Fed Chair Jerome Powell repeated that the Fed still expects inflation to moderate and that high inflation is tied to a handful of categories during the press conference), so the change of tone is likely due to the improvement in the labour market (not just nonfarm payrolls but also other indicators like job openings).
• That said, Fed Chair Jerome Powell said that the labour market recovery still "has a ways to go" during the press conference. So the labour market remains key for the timing of less accommodative monetary policy.
• The Fed says that "the sectors most adversely affected by the pandemic have shown improvement but have not fully recovered". Since the June meeting, the Fed has removed the comments that these sectors "remain weak".
• Basically, the Fed continues moving closer to making monetary policy less accommodative. Fed Chair Jerome Powell repeated that the timing depends on data (and is not pre-determined) and overall Powell sent a less hawkish signal during the press conference than the statement, also saying that the first rate hike is still far away. This may indicate that disagreements within the FOMC are growing. Markets turned around during Powell's press conference.
• We continue to expect that the Fed will turn more and more hawkish in coming months so that actual tapering will start in Q4. We think it is too early for the Fed to make the next change in connection with the Jackson Hole (also given Fed Chair Powell's more dovish comments during the press conference) but think the September meeting is more likely (two jobs reports away). We expect tapering is concluded in summer 2022. We expect the first rate hike in H 2022.

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