July flashlight for the FOMC blackout period

Summary

The July 27-28 FOMC meeting is not expected to bring any changes in policy or even major hints on the timing of an eventual change. Without updated economic projections or a fresh “dot plot,” the July meeting will be about word games.

Since the June meeting, job growth strengthened more than anticipated, and inflation continued to come in much hotter. That will keep eyes and ears keenly attuned to signs that the FOMC may pull forward the eventual tapering of asset purchases, a topic it has already confirmed will be on the table.

We still expect the FOMC to hold of on a formal announcement of tapering until December 14-15 meeting, with purchases starting to be reduced in January of next year at a pace of $10B per month for Treasury securities and $5B per month for mortgage-backed securities (MBS).

Market participants generally appear on board with a late 2021 announcement as well, which is key to avoiding another tantrum. Perhaps most importantly, committee members are split in their views, and it will take time to build a consensus.

Potential catalysts for an earlier taper stem from inflation continuing to surprise to the upside, which might convince Fed officials that recent price pressures will be longer-lasting, and a growing discomfort on the part of some officials about MBS purchases at a time when home prices are soaring.

Less appreciated is the risk that tapering will not be announced until 2022. The case here rests on the fading flscal support and concerns over COVID due to variants or the duration of vaccine effectiveness, any of which could lead to sharper slowdown inactivity. After years of undershooting its inflation goal and with an appreciation of how a strong labor market can support marginalized workers, the FOMC might err on the side of supporting the labor market and take a slower approach to adjust policy. 

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