Fed: Tapering by year-end, tightening a long way away – TDS

US growth has been booming, but it is likely to slow as the boosts from post-covid reopening and fiscal stimulus fade. Strategists at TD Securities discuss their current outlook as well as some key sources of risk and uncertainty.

Fiscal stimulus to fade

“We don't expect the latest COVID-19 wave to have a major growth impact, but there will likely be some fallout. We expect fiscal stimulus to fade to the point of policy turning contractionary on a change basis in FY22, even with another fiscal package. We expect real GDP to slow from a still-very-strong 7% QoQ AR in the current quarter to 4% in Q4 and 2.5% on a Q4/Q4 basis in 2022.!

“Payrolls have lagged GDP, and gains will probably remain strong in coming months. That said, we don't expect the recent pace to be sustained.”

“We expect sharp slowing in inflation as base and reopening effects fade and the surge in used vehicle prices is partly reversed, but YoY readings are likely to remain elevated until the recent MoM data drop out of calculations in 2022.”

“We expect enough ‘substantial further progress’ for Fed officials to announce the start of QE tapering before year-end, but the slowing in growth and inflation in the year ahead is likely to help the case for holding off on tightening (i.e., rate hikes) until well after tapering concludes.”

“We forecast a formal tapering announcement in December 2021, with November also possible, but no rate hike until December 2023.”