Any day now...

As expected, the Federal Reserve kept both its interest rate settings and its quantitative easing program unchanged this week. In the customary press release and in his subsequent remarks, Fed Chair Jerome Powell stressed that progress continued to be made towards the Fed's two main policy goals -- inflation moderately above the 3 percent target and "maximum employment".  He hinted that gradual reduction of QE, the so-called "taper", could begin soon, which markets seem to be interpreting as November, but rate hikes are unlikely to come until well into 2022.

That press release is an odd piece of work. Check out the very long fourth paragraph, which reads as if it was created by merging drafts written by two or three junior staffers, with no attempt at eliminating duplication, let alone actual editing. It's more useful to consider Powell's remarks, which clearly convey his belief that the Fed's aim of achieving inflation above target has now been achieved (overachieved, one  might say) and its maximum employment goal is within reach, despite continuing COVID-related risks. 

The changes in the Fed's economic projections are quite drastic and cast serious doubt on its ability to fine-tune the economy.  As recently as June, it was forecasting GDP growth of 7 percent for this year, but the spread of the Delta COVID variant has led it to scale this back to 5.9 percent. This naturally means that the unemployment rate at year-end will be a little higher than previously expected, at 4.8 percent.  

In a similar way, inflation is also diverging from earlier expectations. Although year-on-year CPI edged down to 5.3 percent in August, it shows few signs of returning closer to the 2 percent target any time soon.  The core personal consumption expenditure deflator, a measure favoured by the Fed, is now expected to average 4.2 percent for the year, up from an earlier projection of 3.4 percent. It seems unlikely that Powell had numbers like these in mind when he first suggested that the rise in inflation was the result of "transitory" factors.

Just to make things tougher for Powell and his team, the US is once again facing a deadline to increase the insane "debt ceiling". Failure to do so by the end of this month could lead to a government shutdown, and possibly see the US default on its debt obligations for the first time since the Civil War.  Powell warned that it would be unwise to assume that the Fed could protect the US economy from damage if this were to happen. You don't say, Jay.  A US default would render any consideration of tapering moot for some time to come.