September 30, 2021



     Global economies, including the United States, slowed some in September under the weight of supply-chain bottlenecks and Delta-variant worries.  Still, the U.S. economy has shown resilience.  Although the August employment report was underwhelming, job openings hit a fresh record high for a fifth consecutive month, retail sales moved higher when a decline was expected and industrial production returned to pre-pandemic level in spite of supply constraints.  The balance of economic indicators had been suggesting the Federal Reserve’s aggressively accommodative monetary policy should be tweaked sooner rather than later.  While the Federal Open Market Committee (FOMC) voted unanimously at its September 21-22 meeting to keep the targeted fed funds range at 0% to 0.25%, as widely expected, the policy statement, the Summary of Economic Projections (SEP), dot plot and Fed Chairman Powell’s press conference painted a less dovish picture for monetary policy.

  GDP and Employment

      The FOMC reiterated from previous meeting’s policy statements “progress has been made toward meeting the Committee’s goals of maximum employment and inflation rate at 2% over the longer run.”  However, the latest statement went on to say, “if progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.”  The accompanying SEP revealed that the Committee pared back its GDP forecast this year, but boosted its outlook for the next two years.  On inflation, the median estimate for core PCE to 3.7% in 2021 (from 3.0%), 2.3% in 2022 (from 2.1%), 2.2% in 2023 (from 2.1%) and 2.1% in 2024.


FOMC Year End


     The dot plot was also updated and hinted at an earlier start for rate lift-off and a steeper path for rate adjustments.  The median for 2022 revealed that Fed officials were evenly split on a rate hike.  Moving forward the median dots signal three rate hikes as appropriate by the end of 2023 and three additional hikes in 2024.  However, a grain of salt needs to be taken with the dot plot since two of the more hawkish leaning District Presidents are leaving the Fed after participating in the projections, and Powell’s tenure beyond early 2022 remains unclear.

     In his post-meeting press conference, Fed Chairman Powell also signaled, but did not commit, that the start of the taper process could begin before the end of the year, perhaps being announced at the next FOMC meeting on November 3rd.  He also suggested that it would end around mid-year of 2022.  Most economists believe the current purchase of $80 billion Treasuries and $40 billion Agency Mortgage Back Securities (MBS) will be reduced monthly by $10 billion and $5 billion, respectively.  While acknowledging that inflation may stay elevated longer, Powell and the majority of the Fed still believes it is transitory.  He also emphasized that the tapering process does not imply rate hikes are imminent.  Powell remained non-committal on a date to announce and start the process of scaling back asset purchases to retain flexibility should negative events occur or if something goes off the rails.  He is also of the mind that the path of the economy is still dependent on COVID-19, and downside risks remain. Congress then adds to the uncertainty as a battle over two spending bills could lead to a sharp curtailment of fiscal stimulus, or pump an additional $4 trillion into the economy over time and overhaul the federal tax system. The bickering over those spending bill also threatened a government shutdown and continues to stoke fears of debt ceiling crisis. With all this playing in the background it is pretty clear that monetary policy is not on a predetermined path.

Targeted Fed Funds Rate