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FOMC Preview: Fed to Affirm Tapering Could Come This Year. Focus Turns to Dot Plot

Since the Jackson Hole symposium and the FOMC minutes, the pandemic has worsened in the US, while economic growth appears to be losing steam. These suggest that all monetary policy measures will stay unchanged with asset purchases staying at US$120B per month and the Fed funds rate target at 0-0.25%. We don’t expect any breakthrough news about QE tapering. The Fed would likely reiterate that it could happen some time this year, without making formal announcement. The updates on the median dot plot will draw close attention. This whole picture could be different with only one or two members change views. The Fed’s staff will also release the latest economic projections at the meeting.

Economic recovery has shown signs of moderation. Nonfarm payrolls increased +235K in August, much weaker than consensus of +750K and +1053K in July. The unemployment rate slipped -0.2 ppt to 5.2%, in line with expectations. On inflation, headline CPI eased to +5.3% y/y in August, from +5.4% a month ago. However, it remains more than double of the Fed’s target. Core CPI, which excludes food and energy prices, slowed to +4% y/y in August, from July’s +4.3%. On a positive note, household spending remains firm. Retail sales surprised to the upside, gaining +0.7% m/m in August, after a -1.8% drop in July. This was probably helped by wage increase. Average hourly earnings expanded +4.3% y/y from +4.1% in July. This exceeded consensus of a +4% gain. Against this backdrop, the Fed’s staff could slightly revise lower GDP growth forecast for this year. The projection of inflation should, however, be upgraded.