Thursday, 25 November, 2021
FED MINUTES: BANK VIEWS
GS: The November FOMC minutes provided little new insight into the FOMC’s tapering plans. All participants judged it appropriate to announce the start of tapering at the November meeting and “some” participants favored a faster taper, but the September minutes had already revealed that “several” participants advocated for a more rapid reduction of purchases. Inflation commentary in the minutes was hawkish on net, however and since the November meeting, several FOMC members have signaled openness to discussing a faster taper at upcoming meetings. Taken together, we believe that there is a significant risk that the taper timeline is accelerated, which would increase the odds that liftoff comes earlier than our July 2022 forecast.
Citi: Citi’s Economics squad concluded this: “No big surprises… but notable there was a robust discussion around preserving options to taper faster and/or hike earlier. Subsequent to this meeting the labor market has tightened further and core inflation has picked up, hence we have doves like Daly that are moving more into the group that wants to act sooner.”
MS: The risk of an earlier end to LSAPs has risen. Incoming data since the November FOMC meeting and recent Fedspeak corroborate our view that the Committee will engage in a robust debate at its December meeting around the need to pick up the pace of taper.
• What stands out in the November minutes: The bar to speed up taper may be coming down, but the criteria for liftoff has not. Discussion in the minutes suggests the Committee is just as uncertain about how to read labor market improvement, but can broadly agree that maximum employment is a ways off, and remains a necessary condition for liftoff.
• Pace of taper: The minutes revealed that “[s]ome participants preferred a somewhat faster pace of reductions that would result in an earlier conclusion to net purchases.“ Various participants noted that the Committee should be “prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the Committee’s objectives.”
JPM: The minutes for the early Nov. FOMC meeting indicate that even before the strong Oct. data, which printed after the meeting, there was already a constituency in favor of speeding up the taper process if inflation continued to run hot. “Some participants” thought a faster pace of tapering “could be warranted” in order to pull forward the timing of liftoff.”
– “‘Various participants” thought the Committee “should be prepared” to hasten tapering if inflation ran too hot,” he added. “The word “various” isn’t one of the standard modifiers used in the minutes, so it’s hard to get a sense of the size of this group, but nobody advocated a slower or potentially slower pace of tapering. Rather “a number of participants” counseled patience before speeding up the taper process. Already, three weeks later, that patience may be wearing thin.”
– He said that the FOMC on inflation was “generally still on board with the transitory narrative, with two qualifiers. First, it would take longer for the storm to pass. It was noted a few times that the Delta variant had slowed the normalization of the spending imbalance between goods and services—a phenomenon they saw contributing to the supply chain bottlenecks (a view we share). The second qualifier is that they were less certain in their transitory assessment. “Many” saw risks of more persistent inflation; “some others” saw little evidence of a wage-price spiral that would generate such inflation. The staff, on the other hand, continues to have a rather sanguine view of the inflation outlook, projecting 2.0% PCE inflation in ’22 and 1.9% in ’23.”
– Feroli noted that “one aspect of the outlook” that the FOMC ““particularly stressed” as being uncertain was the labor market and the evolution of labor force participation. Elsewhere in the minutes, it was noted that “several” participants thought participation was structurally lower than in the past, though “several” others continued to point to pandemic-related factors holding down participation. More generally, “some” thought the labor market was “very tight;” there was no reported counterargument that it was not tight.”
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