Taper Expectations Building

Macro Perspectives: Tue 14 Sep 21

We are nine days away from a Fed meeting, and the expectations are that the Fed will lay out a game plan to begin dialing down QE. The consensus seems to be building for a November taper. But the question is, will they be able to complete the taper?

Today, we'll see the inflation report. Core CPI is running more than double the Fed's target for inflation. If we look at the past four monthly changes in headline inflation (including food and energy prices), prices are rising at a double-digit annual run rate. So, from the inflation picture, plenty of reasons to end the ultra-easy money madness.

That's the "price stability" side of the Fed's responsibilities. What about employment?

The employment recovery has looked very good (at a 5.2% unemployment rate) - getting closer to the long-term average unemployment rate. Add to that, the unemployed in half of U.S. states have now lost additional federal unemployment pay, and should be moving back into the workforce - likely to be represented in the September data. That means lower unemployment.

So, the Fed’s dual mandate of price stability and full employment clearly doesn’t justify emergency level policies. That said, we may find that the recent vaccine mandates will trigger firings and walkouts - and that could reverse this trend in unemployment...

If that's the case, we should expect the Fed to react, justified or not (i.e. they won't be tapering for long).