FOMC: Tapering could start by year-end – UOB

Senior Economist Alvin Liew at UOB Group assesses the latest FOMC event (Wednesday).

Key Quotes

“The Fed Reserve, as widely expected, kept its policy rates and asset purchase program unchanged in its June FOMC. But Fed’s 2021 inflation forecast was adjusted much higher to 3.4% (from 2.4%) while its growth outlook continued to turn more bullish (7% in 2021 from 6.5% previously) and unemployment rate stayed at 4.5% in 2021 and remains on track to head below long term rate by 2022.”

“Further in his news conference, Powell shifted from his previous position of “it is not time yet” to begin talking about QE taper, to acknowledging that officials discussed the cutting back on its bond-buying program at the meeting, characterizing it as “talking about talking about” meeting. Another important development was the FOMC’s June Dot plot chart now showing that a majority of the participants (13 out of 19 members) expect a hike in 2023 (up from 7 in March), although Powell tried to downplay the importance of the Dot plot, saying those projections do not represent a committee decision or plan.”

“Powell’s press conference and the updated economic and interest rate projections suggest to us that there is a shift forward to the Fed policy timeline. The beginning of the “talk about the talk” could now set in motion for taper discussion which will lead to the fleshing out of the tapering of its asset purchase program. The first indicative hint could be released during the Jackson Hole Symposium (26 Aug) and further articulated into a pledge of the taper timeline in the 21/22 September 2021 FOMC. We now expect the first taper to be carried out in December 2021 and the tapering process will last for nearly 1.5 years until May 2023. Thereafter, we project two 25bps rate hikes in 2023, first to 0.25%-0.50% in June and then to 0.50%-0.75% in December.”