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Fed inches toward tapering

May 20, 2021

Benchmark rate increases by 2022 chart

Source: Federal Reserve Board of Governors

Minutes from the April 27-28 FOMC meeting revealed that “a number of participants” felt that it might be appropriate to begin discussing a plan to taper asset purchases in the months ahead. This is another step toward a more hawkish posture that is likely to continue playing out in the years ahead as the expansion matures and the labor market continues to tighten, an evolution that has also been reflected in the FOMC’s dot plot. Four out of 18 participants at the March meeting anticipated hiking rates in 2022 versus just one out of 17 at the December meeting.

Still, this continues to look like a very drawn-out process. Recall that Jerome Powell said after the April meeting that “it is not time yet” to start talking about tapering and that any movement in that direction would be telegraphed well in advance. The Fed chair, then, likely remains firmly on the dovish side of the FOMC spectrum, an important consideration given that his vote will almost certainly carry the most weight (note that a Fed chair hasn’t been on the losing end of a policy vote since the early days of the Paul Volcker era; consider, as well, St. Louis Fed President James Bullard’s comment today that the decision to open the taper debate should be left to Powell). Moreover, the April minutes also revealed again that inflation is expected to ease after a transitory spike and that is likely to be some time before the economy reaches the Fed’s objectives. Policymakers are beginning to lay the groundwork for an eventual turn in policy, but in a far from concerted manner and only at a glacial pace.

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