FED’s September meeting: Potential outcomes

We have received the first commentaries from professionals within the asset management industry, with their thoughts on the potential outcomes of this meeting.

Investor Relations Specialist

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The FED is meeting this week, and the industry is again hoping and waiting for their resolutions, and the effects they will have in the asset management industry. We have received the first commentaries from economists and other asset management professionals with their thoughts on the potential outcomes of this meeting. All the eyes are in Chair Powell and his announcement of the tapering decision.

Tiffany Wilding, Chief US Economist at PIMCO  

Despite a notable downgrade to our real GDP growth estimates since the July meeting – we now expect 3Q real GDP growth of 3% quarter over quarter vs 6.5% originally expected – the FOMC is likely to reaffirm their expectations to begin reducing the monthly pace of their asset purchases “later this year.”  

This reaffirmation is likely to come in the form of the so called “advanced notice” that Chair Powell has promised since the committee announced the forward guidance for the asset purchases last January.

We have long expected the committee to announce their tapering decision at the December meeting, but believe there is a decent chance that they announce as early as November.

Raising the likelihood of a November announcement, last week, some media outlets suggested that Fed officials are “Eying a November Taper.” However, because this coincides with the Treasury’s so called debt ceiling “X-date” (the date when Treasury will run out of funding), we suspect the tapering decision will be delayed to the December meeting.

Christian Scherrmann, U.S. Economist at DWS

September FOMC meeting preview: waiting for November. Given the latest rhetoric by Federal Reserve (Fed) Chair Powell and other officials, we see only a small chance that the Fed will declare “sufficient further progress” or announce the start of tapering in the upcoming September FOMC meeting. While there is certainly sufficient progress on the inflation side of their dual mandate, the recent moderating recovery in the labor markets, some slightly softer recent inflation prints and the uncertainty from the Delta variant is most likely reducing the pressure to adjust monetary policy quickly.

We think that officials might want to wait and see if the promised surge in hiring on the back of expiring extended unemployment benefits in September actually is happening – which we will only know by the November FOMC meeting. Therefore, we stick to our view that tapering will be announced in the November FOMC meeting and that the reductions in asset purchases will start in December 2021 at the earliest.

For the September meeting we expect the Fed to gently guide markets further towards more significant changes in the near future. This could be expressed by an adjustment of the statement, most likely mirroring the Chair’s speech at Jackson Hole where Powell stated that “…if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year.”

Therefore, we are keeping a close watch on the updated Summary of Economic Projections and the dot plot, especially as the first projections for 2024 are due. Since the Fed remains at the upper end of 2021 growth expectations, a slight downward revision might be warranted to align Fed Chair Powell’s formula to economic reality. But the reality remains, despite some likely downward revisions to growth, that the U.S. economy is growing far above potential – one necessary condition for adjusting monetary policy. The same could be true for their 2021 inflation forecasts. Here, however, we expect some revisions to the upside.

While the significance of the dot plot is routinely downplayed by the Fed Chair, we think that market participants have already accepted that tapering is going to begin and are now zooming in on the expected rate path looking ahead. For now, we remain with our call of two to three rate hikes in 2023 and are looking forward to another three hikes in 2024. For 2022 we do not expect the dot plot to signal a rate hike, but we imagine that a minority of individual dots might move up a bit. While this does not necessarily imply an earlier than expected lift-off, it could set a more hawkish tone for the overall meeting.

Jon Day, fixed income portfolio manager at Newton, part of BNY Mellon Investment Management

Federal Reserve Meeting, to taper or not to taper? With headline inflation running ahead of the Fed’s target, they must decide whether it will fall back as bottlenecks dissipate or if there is more of a whiff of permanence about it and it’s time for the pace of bond buying to start falling. 

It’s little over a year since the Fed formally changed its inflation target to AIT with the explicit message that they want inflation to run ‘hot’.  Next week’s meeting is likely to be too soon for the Fed to commit to tapering, it is still very unclear where inflation will settle and there are still uncertainties on the US’s recovery path.  There is still a significant way to go for the US economy to recover all the jobs it lost and there is still a risk of a spike in virus cases causing further restrictions.

The Fed’s messaging may become more urgent but they’ll be patient as to announcing a formal start to tapering, their next meeting in November seems a more sensible time to fire the starting gun.

James McCann, Aberdeen Standard Investments Deputy Chief Economist

The Fed meeting this month is all about the taper. Powell has steadily guided investors into thinking this could be the month when the Fed gives notice that tapering is coming soon. Setting the stage for a more formal announcement in November and the taper starting in December.

And the signal is likely to come with caveats. The Fed will want to make tapering contingent on better labor market data than we saw in August, and on the evolution of the Delta wave still sweeping the US.

Powell is also going to want to play down the chances of interest rate rises happening anytime soon. The economic projections that we’ll get next week could show Fed members bringing forward when they think rates will rise in the wake of stronger inflation, and that will only add to the market’s anticipation. Powell will try to dampen that enthusiasm by saying rate rises are still a long way off and reliant on data that the Fed doesn’t have yet.

Gilles Moëc, Chief Economist at AXA IM

Expect statement to say taper imminent but avoid date. We still expect Dec announcement.

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It is at its most acute when deciphering the statements and speeches of officials of the US Federal Reserve (Fed), where the responsibilities are all the greater given the influence of US monetary policy and US government bond yields as a marker for rates more globally.

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FED’s September meeting: Potential outcomes