Here comes the taper

It has to be said that the language of FOMC policy decisions is becoming ever more convoluted. In keeping its funds target range unchanged at 0-0.25 percent today, it expressed its stance this way:

"The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time".

It is, of course, always the case that policy decisions reflect the judgment of FOMC members; there is no mechanistic formula. Still, wording such as "levels consistent with the Committee's assessments of maximum employment" and the double use of the phrase "for some time" do not exactly provide much guidance for financial markets. Elsewhere in the statement, the Fed says that "Inflation is elevated, largely reflecting factors that are expected to be transitory."  The clear impression is that the FOMC is still feeling its way along here, which is perhaps inevitable in present circumstances. 

There is one important change, however: the taper is on. The Fed is now setting out a clear path for the winding-down of its asset purchase programs. Purchases of Treasuries will be cut by $10 billion per month and mortgage-backed securities by $5 billion per month, starting almost immediately, and a further reduction of the same size will take place in December.  The FOMC expects to continue reducing purchases by similar monthly amounts after December, if conditions allow. 

Since an end to net asset purchases seems like a precondition for rate hikes, this suggests that a tightening cycle cannot begin until mid-2022. Whether the "transitory" inflation pressures will still be around by then is something we shall just have to wait and see.