The Federal Reserve (Fed) is currently adding $120 billion per month to its balance sheet – $80 billion of U.S. Treasury securities and $40 billion agency mortgage-backed securities – through a process known as quantitative easing (QE). Investors are anxiously awaiting news of when the Fed will begin “tapering,” or slowly reducing the size of its monthly bond purchases.
We now anticipate the Fed will announce, at its two-day meeting on September 21-22, that tapering will begin in November. Previously, we expected tapering to start in the first quarter of 2022 unless job growth was hitting roughly one million per month over the summer. Well, that is essentially what occurred in June and July, increasing by 938,000 and 943,000, respectively. Moreover, the unemployment rate has declined to 5.4% from a peak of 22.9% in April 2020.
Minutes from the last Fed meeting strongly suggested that tapering will begin sooner rather than later. Since then, seemingly all of the regional Fed presidents have publicly discussed the need to pare back the monthly purchases. The vast majority have either used a euphemism – such as “it’s time to taper” or have explicitly said October or November. By our count, a plurality 6 of the 11 current voters are now effectively on the record for tapering in 2021.
We don’t think that Fed Chairman Jay Powell will ‘tip his hand’ regarding tapering at the Fed’s Jackson Hole Symposium this week. Frankly, it’s not the right forum for it. More importantly, waiting until the September meeting will give the Fed the August jobs report, six more weeks of weekly jobless claims, along with another month of inflation data and COVID-19 delta variant numbers before unveiling its updated timeline. (We don’t foresee a big economic impact due to delta, which is showing signs of peaking). Lastly, starting a few months earlier—later this year rather than in 2022—means that the tapering process can potentially go slower, if needed.
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