The Fed this week will announce acceleration of QE tapering. With inflation approaching 7%, policymakers would likely revise its view on inflation outlook and “retire” the word “transitory”. The updated economic projections and median dot plots showing members’ interest rate projections would also be released. The Fed funds rate will stay a 0-0.25% until mid-2022.
Inflation accelerated to a 39-year higher of +6.8% y/y in November, in line with expectations, from +6.2% in the prior month. Core CPI, inflation excluding food and energy, rose to +4.9% y/y, from October’s +4.6%. The job market remained resilient.
The unemployment rate slipped -0.4 ppt to 4.2% in November, beating consensus of 4.5%. Non-farm payrolls increased +210K, following a +531K addition a month ago. This fell short of market expectations of +550K. Participation rate climbed +0.2 ppt to 61.8% for the month. The economy expanded at an annualized +2.1% q/q in 3Q21, up from +2% in the prior quarter. At a speech before the Congress, Fed chair Jerome Powell suggested that the word “transitory”, meaning that “it won’t leave a permanent mark in the form of higher inflation”, should “retire”. This signaled that Fed realize that elevated inflation is more persistent than previously anticipated. At the updated economic projections, the staff should revise higher inflation rate and lower the unemployment rate.
On the monetary policy, Powell reiterated several times that discussion about accelerating QE tapering at would be made at the December meeting. As he indicated, the central bank is “going to have a conversation at our next meeting about accelerating the taper and ending our asset purchases a few months early”. We expect the Fed to double the size of tapering to US30B / month, a pace that would lead the entire QE program to finish by early March 2022. The focus would then turn to rate hike. CME’s 30-day Fed funds futures currently projects that at least one rate hike will be seen in May 2022.