Fed meeting: forget the slow crawl to tapering, it’s the dot plot that matters

There have been a lot of worrying signs for the US economy lately. The unexpected resurgence in Covid infections due to the highly contagious Delta variant has knocked back both business and consumer sentiment over the summer, to the extent that jobs growth slowed substantially in August. In the meantime, there are some early indications that inflationary pressures may be cooling a bit. Both are strong grounds for the Fed to wait a little longer before reaching a decision on tapering.

However, although the economic data have been somewhat as unpredictable as the evolution of the virus path, there’s more than enough evidence to suggest that the American economy is far from being in trouble. The housing market is still booming, record job vacancies suggest the bumps in the jobs recovery are a supply problem not a demand one, and even consumers aren’t as gloomy as pointed out by some of the surveys, with retail spending growing solidly in August.

Tapering: almost there but not quite

So does this mean the Fed will announce a plan on Wednesday on how it will wind down its $120 billion monthly asset purchases? Probably not, but policymakers will very likely give strong hints that they’re getting very close to meeting their criterion to begin tapering and markets should expect a decision at the next meeting in November.

Fresh jitters about the Chinese economy have added some uncertainty going into the meeting. But even if the fallout from the Evergrande crisis were to escalate, the Fed is already seen as being behind the inflation curve, so policymakers are unlikely to be able to delay tapering beyond the end of this year. A bigger risk for Wednesday is probably what Fed chief Jerome Powell says about inflation – whether he thinks it is levelling off, how worried he is about a slowdown in growth, and if he makes any remarks about the longer term outlook for US rates.