FOMC: At 14:00EST/18:00GMT – FOMC rate decision and statement. No updated Summary of Economic Projections (SEPs). Chair Powell’s press conference will begin at 14:30ET/18:30GMT.

Summary:

It should be a more straightforward meeting with just the statement and Powell’s press conference

to digest.

Powell removed much of the guess work heading into this meeting at his appearance just ahead of the
premeeting black out (10/22nd) in which he conceded he thinks it is time to taper, consistent with the
message from most other Fed speakers seen since the Sept meeting.

Minutes from the Sept meeting were also a strong indication that a taper announcement was imminent.

Participants agreed that a moderation in the pace of asset purchased would soon be warranted and

expected that it would be appropriate to end asset purchases by the middle of next year. The minutes also

gave a strong indication on pace of the taper as most participants seemed to favor a $10B/$5B monthly pace

of tapering. Minutes further added, “several participants indicated that they preferred to proceed with a

more rapid moderation of purchases than described in the illustrative examples”.

Most now expect reduced purchases will be commence on Nov 15th (as opposed to mid-December) with the

next buyback schedule which will be released on Nov 12th. The Fed are expected to cut purchases by -$10bn
USTs/month and -$5bn Agency MBS/month with the process concluding by June. Some think the risks are

skewed to a quicker taper timeline.

The logistics of the taper may be laid out in the FOMC statement itself as part of the policy implementation

note.

Street Views:

BoA (Cabana, Meyer): The Fed is likely to announce tapering at the upcoming November FOMC

meeting, reducing TSY purchases by $10bn and MBS by $5bn, while noting asset purchases are not

on a pre-set course. We think Chair Powell will likely separate taper and rate hikes as two distinct

decisions; the latter will depend on realized and future inflation at 2% or above coupled with

achievement of maximum employment. Rate hikes are “a ways off” but Chair Powell is unlikely to

push back on the market timing of rate hikes, which have been brought forward materially. We

think he will also likely caution supply constraints lasting until 2022, resulting in continued elevated

inflation. If persistent inflation risks moving much higher via wages and inflation expectations, the

Fed won’t hesitate to react, in our view.

We see risks Fed comments are interpreted as hawkish due to (1) recognition of upside inflation

risks, (2) faster taper pace, and (3) potential future balance sheet reduction. This could sustain or

extend the recent UST curve flattening trend. Similarly, risks to the US dollar are skewed to the

upside around this week’s Fed meeting, in our view.

Danske: Two things to watch out for. Will the Fed start tapering immediately already from

November or wait for December? And how fast will the Fed taper? We expect the Fed to start

tapering immediately with a tapering pace of $15bn per month, implying that the Fed ends tapering

in Q2 22, in line with the illustrative path from the last meeting. Risk is tilted toward a faster, not

slower, tapering pace of $20bn per month. It is one of the interim meetings, so there are no

updated projections or dots in connection with the meeting. So all focus is on the press conference.

On Friday (oct 22), Fed Chair Powell sounded more concerned about bottlenecks and inflation,

saying that risks are tilted clearly towards prolonged bottlenecks and higher inflation and that the

Fed is monitoring inflation carefully. To us, the Fed is likely to make another hawkish shift, although

it is more difficult to make a big one at interim meetings (and Powell was out speaking last Friday).

With tapering looming, the next big question is when the Fed will start hiking the Fed funds target

range and how much. We expect, however, Fed Chair Powell will repeat that the tapering decision

is not related to the rate hike decision. We do not expect markets to listen a lot to this statement.

First of all it is not a new statement and investors have started to price in rate hikes anyway and

second of all tapering marks the beginning of policy tightening. The Fed is likely to remain some

flexibility to increase/slow the tapering pace if needed. Also we cannot rule out that the Federal

Reserve will be forced to raise rates earlier during tapering if inflation and inflation expectations

rise further

DB (Luzzetti/Hooper/Snyder): The November FOMC meeting should serve to kick off the Fed’s well-

telegraphed tapering of asset purchases. In line with recent guidance, we expect that the Fed will

announce monthly reductions of $10bn and $5bn of Treasury and MBS purchases, respectively.

With the first cut to purchases coming mid-November, this will bring the latest round of QE to a

conclusion in June 2022.

While this roughly eight-month tapering timeline provides some flexibility to respond to a rapidly

evolving economic environment, Chair Powell should note that the Committee will adjust its plans

as necessary to achieve appropriate policy settings. On this point, we expect Powell will not actively

push back on market pricing of rate hikes given elevated uncertainty about the outlook, particularly

as it relates to upside inflation risks. With the taper announcement concluded, the debate about

when to raise rates and how quickly to tighten will be the key area of focus looking ahead for the

Committee. As a reminder, we recently pulled forward our expectations for liftoff to December

2022 in response to more persistent price pressures .

Jefferies: (Markowska/Simons) A taper announcement is a foregone conclusion. We expect the

FOMC to announce a $15bn reduction in asset purchases which is likely to go into effect on Nov 15.

Maintaining this pace will put the Fed on track to finish QE by mid-June.

The bigger question is whether the FOMC will keep the “transitory” language. We are leaning

toward a yes, because removing it could unhinge the front end of the curve, and in turn cause an

unwanted tightening of financial conditions. Instead, we expect the Fed to finesse the

accompanying language, by acknowledging that inflation pressures have been more persistent than

expected. – Will Powell push back on early rate hike expectations? Again, we are leaning toward a

yes, since the Fed is probably not comfortable with the two hikes currently priced in for 2022. But,

Powell will have to walk a very fine line, since pushing back too hard could unhinge inflation

expectations, but not pushing back at all could unsettle the front-end of the curve.

 

JPM: (Feroli) At [this] week’s FOMC meeting it is almost certain that the Committee will decide to

commence tapering asset purchases, effective mid-November, and with an intent to conclude those

purchases by the middle of next year. This has been all but pre-announced. Perhaps more

interesting will be the language in the post-meeting statement, particularly with respect to

inflation. Since the April meeting, the FOMC statement has tersely described high inflation as

“largely reflecting transitory factors.” Next week’s statement will give the Committee the

opportunity to revise or expand upon this description.

Powell will likely use the press conference to explain that tapering is not tightening and that

tapering is not entirely on a preset course. There has been more chatter lately about the

sequencing of normalization, and so Powell may use this opportunity to reiterate some of the

Committee’s policy preferences: first complete asset purchases, then liftoff, and only after then

allowing the size of the balance sheet to decline.

GS (Hatzius) The FOMC will announce the start of tapering next week, presumably at the

$15bn per month pace noted in the September minutes. If implementation begins in mid
November, the last taper would come in June 2022. Large surprises on the virus, inflation, wage

growth, or inflation expectations could prompt a revision, but we think the hurdle for a change in

either direction is high. The biggest complication is the guidance in the FOMC statement that even

the first rate hike requires maximum employment. However, with inflation far above target,

unemployment likely below the median participant’s 4% NAIRU estimate, and job availability high,

we think the committee will conclude that most if not all of the remaining weakness in labor force

participation is structural or voluntary.

The FOMC will likely modify its statement to acknowledge that inflation is likely to remain high for

somewhat longer, and Chair Powell will likely acknowledge the more persistent inflationary

pressure from strong rent and wage growth. Further modification of the increasingly

awkward language in the statement about “inflation having run persistently below this

longer-run goal” also remains a risk.

 

MS: Providing details on the taper will add length to the FOMC statement. We expect the

Committee to indicate it has seen substantial progress toward its goals, which warrants a reduction

in the pace of purchases. We expect the Fed to set the taper on a monthly frequency, but stress

that the program is flexible. When asked in the Q&A, Chair Powell could remind the public that the

Committee could ramp up the pace of taper should the data come in better than expected, or

reduce the pace of, or stop the taper should the data come in worse than expected.

While recent FOMC statements have seen only modest changes, the November FOMC statement

may bring the largest number of changes, at least by word count, that we have seen in sometime.

We expect to see some adjustments to the characterization of current conditions, risks to the

outlook, and of course a spelling out of the decision to taper asset purchases.

 

Wells: (Schumacher/Griffiths) We are on the taper bandwagon: on Wednesday we expect the Fed

to announce asset purchase reductions. They probably will go into effect for the mid-Nov to mid-
Dec purchase schedule. This is clearly the consensus call and should produce a limited market

reaction. In our view, yields in the belly and long end of the curve should rise modestly.

• The Fed probably will change the policy statement to acknowledge more persistent inflation

pressures. In September it read, “Inflation is elevated, largely reflecting transitory factors.” If the

formal language seems much more concerned with inflation versus a simple “mark-to-market”

assessment consistent with policymakers recent public remarks, we think the U.S. dollar and yields

in the front end and belly could rise more notably.
Chairman Powell almost certainly will try to separate the taper announcement from an indication

on the future path of the policy rate. We emphasize “try.” OIS markets currently price 49bps of

tightening in 2022 with 70bps more in 2023. We think this is overdone but may take some time to

reverse unless Powell clearly pushes back this week.

Wrightson: (Crandall) While the Fed probably won’t tinker with the effective date of the QE

cutbacks, we do expect Chair Powell to caution against the assumption that the FOMC intends to

segue directly from tapering to tightening by mid-2022. Granted, a few FOMC hawks do think that

would be appropriate, and a number of more mainstream FOMC members would at a minimum like

to have more policy flexibility in case circumstances change. However, in the last quarterly

summary of economic projections released by the FOMC six weeks ago, half of the committee

anticipated no need to raise rates at all in 2022, and only three thought that more than one rate

hike would be called for next year. The market currently has two full rate hikes priced in by

December 2022; six weeks ago, nearly half of the FOMC anticipated only two rate hikes by

December 2023.

At a minimum, Chair Powell will repeat his September warning about extrapolating from the Fed’s

taper decision: The timing and pace of the coming reduction in asset purchases will not be intended

to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a

different and substantially more stringent test.

In addition, Powell’s discussion of the economic outlook is likely to suggest that he personally is in

no hurry to get to the liftoff phase of this policy cycle. Our guess is that Chair Powell was in the

2023 liftoff camp in the September dot plot, and we suspect the same would be true again this

week if the FOMC were conducting another formal forecasting exercises

Source: InTouch Capital Markets

 

James Fay Founding Partner T +44(0)20 7422 2978 M +44 (0)7500 988 788 E james.fay@archr.com 49 Carnaby Street, London, W1F 9PY United Kingdom ARCHR.COM

 

 

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