Discussion about tapering likely to start at next FOMC meeting – Rabobank

Previewing next week's FOMC meeting, "given recent data the economic projections of FOMC participants are likely to see an upward revision for PCE inflation in 2021 and the dot plot may be getting closer to a rate hike before the end of 2023," said Rabobank analysts.

Key quotes

"The Fed is pushing back verbally against fears that high inflation is permanent and should underline this in its inflation projections for 2022 and 2023. Today’s University of Michigan consumer survey suggests that the Fed has been successful in talking down consumer inflation expectations somewhat."

"The discussion about tapering the asset purchase program is likely to start at this meeting, so it will be interesting to hear what Powell has to say about this topic at the post-meeting press conference."

"The practical problem for the FOMC is to assess whether “substantial progress” has been made regarding unemployment and inflation while the data remain heavily distorted at least until early September. The unemployment forecast for 2021 may give us a clue about the Fed’s numerical threshold for tapering. An early warning signal for tapering will inevitably be given in a situation with data clouded by the temporary labor shortage."