Today’s FOMC was a relatively straightforward, as-expected affair.
· The tapering of QE begins this month with a reduction of $15 bn per month ($10 bn in treasuries, $5 bn in mortgages)
· At this pace, QE will be done in mid-June, which sets the stage for rate hikes in the second half of 2022.
· Chairman Powell seems unconcerned with inflation persisting beyond 2022, preferring to focus on the Fed’s desire to reach full employment before raising rates.
Our take-aways
· The bar for the Fed to worry about inflation appears to be very high.
· Tapering means less distortion of the yield curve, leading to upward pressure on rates.
· Job numbers (i.e. jobs created, unemployment, and participation rate) are the most important data points for rate hikes.
· While the definition of ‘full employment’ is unclear, what is clear is that rates are going higher. The question now is when.
