Anna Stupnytska, Global Economist at Fidelity International, comments on today’s FOMC meeting:
“Markets expected the Fed to deliver a dovish message as concerns over global growth driven by the spread of the Delta variant have intensified over the past few weeks. However, contrary to these expectations, the statement was somewhat hawkish as it did not feature the Delta variant risks explicitly, although Chairman Powell referred to it in the press conference. Moreover, with respect to ‘substantial further progress’ in the labour market required for tapering, the statement acknowledged ‘the economy has made progress toward these goals’. In the press conference, however, Powell noted they are still ‘some ways away’ and have ‘some ground to cover’ on the labour market progress, sending a slightly more dovish message relative to the statement.
“The growing risks around the outlook since the last meeting, as well as concerns about potential spillovers from China market weakness driven by regulatory actions, have evidently not been sufficient for the Fed to ‘blink’ and postpone tapering discussions and the ultimate announcement in coming months. Indeed, US financial conditions have actually eased further since the June meeting, now at the easiest levels not seen for decades. At the same time, market-based inflation expectations have been stable over the past few weeks. This must have encouraged the FOMC members to press ahead with tapering planning and delivering first hints about the timeline in coming meetings.
“But, even as the talk about tapering kicks off, we believe the Fed will be cautious and measured in scaling back monetary stimulus, facing an extremely delicate balance between providing just enough accommodation to sustain easy financial conditions and manage the higher debt burden and, at the same time, keeping inflation and financial stability risks in check.”