It's Taper Time
By Taylor Schleich & Jocelyn Paquet
National Bank of Canada, Financial Markets
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At long last, the taper has arrived. Powell and the FOMC had very clearly telegraphed that this was coming, including the pace of the taper, so there was nothing to be surprised about on this front.
The focus will now shift to whether or not the pace of the taper will have to be accelerated. We tend to think that this will materialize—and the Fed left the door open to this possibility in the statement and press conference—though the earliest we'd likely see an acceleration would be early next year.
Chair Powell and the Fed appear committed to the transitory inflation narrative, though there does seem to be much more uncertainty evident in this statement's characterization of the inflation outlook. While he acknowledged more persistence than previously thought, Powell's presser indicated they expect price pressures to abate midway next year. This continued commitment to remain patient hasn't been the case at a growing number of other developed market central banks (i.e. the BoC, the BoE, the RBA to name a few), where earlier-than-previously-expected policy rate normalization appears likely.
We'll be keen to see how Powell and the Fed manage the messaging on future rate increases in the weeks and months ahead. For now, policy rate expectations are much better anchored in the U.S. than in many developed markets. However, we expect those to increasingly come under pressure with a potential 6% CPI print next week adding fuel to the fire.
At some point, we believe the balance of risks of between fostering full employment and letting inflation run hot will tip the scale towards the Fed removing accommodation faster than is currently being telegraphed.
Taylor Schleich & Jocelyn Paquet
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