October flashlight for the FOMC blackout period

Summary

We expect the FOMC to formally announce plans to taper asset purchases at the conclusion of their next meeting on November 3.

"Substantial further progress" has clearly been made on the Fed's inflation goal since last December when inflation was well below the Committee's 2% target. Currently, at3.6%, core PCE inflation is at its highest level since 1991.

The labor market's progress has been the holdup and kept the debate over when theFed will taper alive a little longer. While the September employment report showed an underwhelming number of job gains, the FOMC has stressed the accumulated progress, rather than the pace of progress, in the labor market. Comments from Chair Powell and other voting members since the last jobs report have continued to signal support for an announcement at the upcoming meeting.

We expect the Fed will reduce purchases of Treasuries and mortgage-backed securities (MBS) by a respective $10B and $5B per month, beginning in early December. At this pace, the Fed would complete its asset purchase program by the end of June 2022. The Fed's balance sheet would be slightly above $9 trillion.

Since the last FOMC meeting, market pricing for the first-rate hike has been steadily pulled forward into October 2022. If realized, the time between asset purchase sending and lift off of the fed funds rate would be much faster than the one-year gap that occurred during the past cycle. We believe the tapering announcement is likely to come with another firm reminder that the bar for increasing the fed funds rate is much higher than it is for reducing asset purchases. Between an extended employment gap and our projected slowdown in inflation, we expect the FOMC will not hike rates until 2023.

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