Fed Chair Powell quipped that this was the FOMC’s “first deep dive” into QE tapering discussions. The outcome didn’t make any new waves and in fact, the results of this meeting calmed the seas of the markets’ tapering angst. There was nothing really new in the statement or in Powell’s press conference. Indeed it was what was left out that was the most crucial development.
The FOMC didn’t make any policy adjustments and didn’t indicate any imminent shifts toward trimming accommodation. Today’s press conference and the statement clearly take the August Jackson Hole meeting off the table in terms of a timing announcement. November might be the earliest that the Fed would give notice of a shift.
The policy statement released 30 minutes before Chair Powell’s press conference was initially read more hawkishly by the markets than it was. The Chair’s easy tone in his presser further underscored that position. Newswires headlined one cherry-picked phrase from the statement that the Fed “has made progress toward” its goals. Treasury rates twitched higher and equities dipped fractionally, though the crucial adjective “substantial” was missing. The FOMC sees “substantial further progress” as the necessary condition for the start of a shift away from the accommodation.
Additionally, the Fed’s statement also came with the caveat that “risks to the outlook remain.” Furthermore, Powell stressed several times that while progress has been made toward the employment and price goals, tapering is still “a ways off.” These QE discussions will continue at coming “meetings,” which was plural. That would mean November would be the earliest that the Fed gives notice of a shift. Meanwhile, he also stated that “we’re clearly a ways away from raising interest rates and that’s not something on our radar screen.”
Much of the press conference was devoted to inflation and here his lack of concern over price pressures further soothed the bond market, though worries have been ebbing for weeks. Powell was even asked about the slide in Treasury yields since June, where he said there is no clear consensus on the decline, but it could be a function of the drop in real yields amid growth worries emanating from the Delta variant, or a slip in inflation compensation, as well as technical factors. He doesn’t believe any of them are suggesting doubt over the Fed’s new framework, stressing he believes it is well understood. He added that the real test will be when the Fed starts to raise rates.
The “transitory” nature of inflation was highlighted again, adding to the dovish tone of the meeting. The Chair clarified that transitory means “temporary” and is something that does not leave a “permanent mark.” However, it does not mean price increases will be taken back. Inflation is a process where prices go up year after year after year. He referenced a likely period for an outsized price increase of 12 months (he had referenced about 6-months in recent Congressional testimony).
This is in keeping with the assumption that bottlenecks and other constraints could leave prices elevated and be longer-lasting than previously thought. He noted that inflation currently is more than “moderately” above the 2% average target, but it should wane. He also doubts the current environment is boosting consumer expectations for future inflation.
Powell also downplayed a possible wage-price spiral, noting the Fed is not seeing a rise in unit labor costs that would force companies to either boost prices or accept lower margins. He assured that the Fed will remain watchful for such. Wages moving up across the economy in a way that is consistent with inflation and productivity is a good thing he added.
Clearly, the Fed is not ready to embark on a tapering path, and is not worried about inflation problems, leaving bonds modestly richer on the day with longer yields back near February lows.
The 10-year rate finished fractionally lower at 1.238%. It had popped to 1.272% on the headlines that “progress” had been made, but quickly eased back.
The 30-year bond, the most inflation-sensitive maturity, declined 1.4 basis points to 1.880%. The 2-year slipped to 0.202% as it sees little chance of a rate hike over its lifetime. Meanwhile, the NASDAQ rallied 0.70%, with some support from the decline in bond yields, while the S&P 500 was off -0.02%, with the Dow -0.36% lower. The dollar index has slumped to 92.27 versus an intra-day high of 92.75 just after the statement was released.
