Fed Meeting Preview: Can We Expect Taper Tantrums?

The Federal Reserve Open Market Committee is meeting this week and analysts and investors are watching for the same thing: will there be any changes to the Fed’s easy money policies anytime soon? 

“There are two unknowns that will decide whether tomorrow’s FOMC meeting is hawkish or dovish,” said Tom Essaye, founder and president of Sevens Report Research. “First, how does the Fed admit it’s talking about tapering quantitative easing? Second, do the ‘dots’ show a rate hike sooner than expected?” 

The ‘dots’ refers to the Fed’s updated interest rate projections – the ‘dot plot.’ It will be released after the Fed’s two-day meeting. 

More than half of economists surveyed by Bloomberg predict the dot plot will show the median of 18 officials penciling in at least one 2023 interest rate increase. Others predict there will be no change from the current near-zero rates until 2024 at the earliest, which is in line with the Fed’s March forecast. 

“I think a rate hike in 2022 would surprise people because theoretically, we won’t even run off of quantitative easing until the end of 2022,” said Essaye. “The dots could show a little bit of a surprise, but it’s just something we’ll have to watch to see how long the Fed thinks we will stay at zero.” 

40% of those polled expect the Fed to start to begin tapering its current $120 billion/month bond purchases in late August of this year. All eyes will be on Chair Jerome Powell, who may speak following the Fed’s Aug. 26-28 policy retreat in Jackson Hole, Wyoming, and give insight into any bond purchase taper talk. 

The FOMC is expected to maintain its previous stance that bond purchasing will not be changed until the US economy shows “substantial further progress” on the employment and inflation front. The Fed’s inflation goal is 2% and its target benchmark interest rate is from zero to 0.25%.

Consumers are concerned about inflation, as demonstrated by last week’s consumer prices data. Prices in May rose at the fastest annual rate since 2008, surging 5% from a year prior, Thursday’s CPI data revealed. It’s the biggest increase since the Great Recession. 

Experts have been stressing for months that any inflation will be transitory, and is to be expected given the fallout from the pandemic. 

“When money supply goes up substantially from fiscal stimulus, it increases the demand that people have for many types of goods and services,” said Lyn Alden, founder of Lyn Alden Investment Strategy. “However, the supply of those goods and services did not increase, so naturally we are running into supply constraints of varying degrees of length.” 

Powell’s current four-year term as Fed chair ends in February 2022, after that President Biden may appoint someone new or keep Powell on. Powell has remained quiet about whether or not he expects or wants to serve another term.