Paul Ashworth, Chief US Economist
The Fed unveiled its QE taper today, as widely expected, but is still insisting that the surge in inflation is "largely" transitory, which suggests the doves still have the upper hand.
As expected, the Fed announced that it will reduce the pace of its asset purchases beginning this month, with the current $80bn per month of Treasury securities to be trimmed by $10bn in November and a further $10bn in December. The $40bn of MBS purchases per month will be trimmed by $5bn in each month. Echoing the language the Fed used at the end of QE3, the statement notes that "similar reductions in the pace of net asset purchases will likely be appropriate each month, but [the FOMC] is prepared to adjust the pace of purchases if warranted by changes in the economic outlook." The new statement doesn't resurrect the old language about purchases not being on a preset course, but the sentiment is very similar. At first glance, the reluctance to pre-announce the whole month-to-month tapering plan with an end date for mid-2022 could be considered dovish. But the alternative is that some hawkish officials might want to speed up the taper early next year, particularly if inflation continues to run hotter than expected.
The statement does add a little more to the inflation assessment, but the language is still surprisingly dovish. Previously the statement noted that "inflation is elevated, largely reflecting transitory factors", whereas the new statement says that "inflation is elevated, largely reflecting factors that are expected to be transitory". Tomayto, tomahto. With wage growth at its strongest since the early 1980s, inflation expectations rising and signs of a breakout in cyclical price inflation, particularly rents, the FOMC's insistence that this is still just a temporary shock "related to the pandemic and the reopening of the economy" looks to be dangerously behind the curve. Overall, given the inflation language, this is a bit more dovish than we expected and, despite surging market expectations, supports our view that the Fed won't begin hiking interest rates until early 2023.