Courtesy of Curvature Securities’ Scott Skyrm, here are four key takeaways from the Powell presser:
- 1. Inflation – The FOMC statement mentioned the word “inflation” or “price stability” a total of 10 times. It’s clearly on their mind, even though they continue to call it “transitory.”
- 2. Tapering – “Last December, the Committee indicated that it would continue to increase its holdings … until substantial further progress has been made … since then, the economy has made progress … and the Committee will continue to assess progress in coming meetings.” I read that as ‘we will announce tapering at a meeting in the near future.’
- 3. Standing RP Facility – The FOMC discussed the details of this facility at the last meeting and pulled the trigger today. The facility will be the mirror image of the RRP facility. The Fed will provide cash to approved Primary Dealers at a rate of .25% (upper end of the fed funds target range) with a program limit of $500 billion. Though .25% is currently well above market rates, there will be in time in the future when this facility will be used regularly. But that’s a few years away. Between now and then, the Fed officially created a corridor system for Repo rates with the RP facility as the ceiling rate at .25% and the RRP facility rate as the floor at .05%.
- 4. Goodbye IOER. The terms IORR and IOER will be replaced with IORB (Interest On Reserve Balances).
To this will will add one more observation:
- 5. Powell defined “substantial further progress” as maximum employment with little/no regard for inflation. This means that while tapering is coming – eventually – it will be a function of improvements in the labor market not in response to soaring inflation. And should the Delta variant lead to another round of stimmies and more unemployment benefits, we may not see normalization in the labor market – and lower unemployment rates – for a long, long time.
Finally, for those confused by Powell, you are not alone as Mohamed El-Erian explains:
I suspect that many may agree that this was one of the most confusing #Fed press conferences. Where there may be disagreement is why—particularly, the balance between genuine economic uncertainties and what behavioral scientists call “active inertia”/too deeply wired convictions.
— Mohamed A. El-Erian (@elerianm) July 28, 2021
