Monday, October 18, 2021

FOMC Meeting: Fed Leaves Markets Guessing about Tapering

Must read

imageStock Markets40 minutes ago (Sep 23, 2021 12:31PM ET)

(C) Reuters. FOMC Meeting: Fed Leaves Markets Guessing about Tapering

The Fed is expected to begin tapering soon, according to a statement issued following the September FOMC meeting. However, it didn’t provide a time frame for what that means, leaving markets guessing once again.

What the Fed provided is an assessment of the overall economic activity and financial conditions. “With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen,” said the FOMC statement.

The statement continued, “The sectors most adversely affected by the pandemic have improved in recent months, but the rise in COVID-19 cases has slowed their recovery. Inflation is elevated, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.”

Meanwhile, the Fed reiterated that the pace of the economic recovery depends on the speed of the pandemic. “The path of the economy continues to depend on the course of the virus, “the FOMC statement said. “Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain.”

Simply put, the virus will set the pace of monetary policy for months to come.

Dual Mandate?

What about the Fed’s dual mandate of maximum employment and stable prices? How close is the economy to reaching these goals?

Once again, the Fed was vague about it. “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run,” said the FOMC statement.

“With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved.”

Simply put, the Fed is targeting average inflation rather than absolute inflation. It’s willing to tolerate inflation above 2 percent for quite some time to make it up for inflation below 2 percent in the previous year.

Perhaps the Fed is trying to avoid Japanese-style deflation. Thus, fighting inflation is not a priority at this point, which allows the Fed to focus on the other goal of maximum employment. Yet, as has been the case in its previous statements, the Fed has avoided defining what maximum employment is, reiterating the view that maximum employment depends on “several conditions” and that unemployment remains elevated for “certain groups.”

Bottom Line

The Fed’s view that the economy has yet to reach maximum employment seems to be in sharp contrast with what’s happening in the real world, where company after company has a hard time finding workers to do the job. For instance, this week, Lennar (NYSE:LEN), D.R. Horton (DHI), and FedEx (NYSE:FDX) cited labor shortages as negatively affecting their businesses.

Apparently, either the Fed’s easy monetary policy isn’t working, or its view of maximum employment is flawed.

Disclosure: At the time of publication, Panos Mourdoukoutas had a position in FedEx.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of Tipranks or its affiliates, and should be considered for informational purposes only. Tipranks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. Tipranks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by Tipranks or its affiliates. Past performance is not indicative of future results, prices or performance.

FOMC Meeting: Fed Leaves Markets Guessing about Tapering

Latest article

SUBSCRIBE HERE