Despite recent disappointing inflation prints, Fed maintains that recent inflation misses are largely due to one-off factors and that above-trend growth will keep the unemployment rate below NAIRU, helping to nudge inflation toward target next year, suggests analysis team at Deutsche Bank.

Key Quotes

“With this outlook, they continue to judge that a gradual removal of accommodation is warranted to guard against risks that the labor market overheats, which could force the Fed to raise rates more aggressively, and more disruptively, in the coming quarters. It is possible that the Fed will both raise rates and announce a shift in its balance sheet policy at the same meeting if the economy, labor market, and (most importantly) inflation surprise to the upside. But recent inflation data have raised the bar for such surprises. The Fed has laid a clear course for the tapering process. While the endpoint is still unknown, we expect based on what the Chair'a remarks,  that the endpoint will fall well short of a return to zero excess reserves.”

“DB economists' expectations for Fed policy for the rest of this year are unchanged: we continue to expect a formal announcement about unwinding the balance sheet at the September meeting, to start in October. We also expect a pause in the rate hiking cycle in September, followed by another rate hike in December, assuming that the economy evolves in line with the Fed’s expectations.”

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