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Below is Perspective on FOMC  by Madhavi Arora, Lead Economist, Emkay Global Financial Services 

FOMC:  Starting the countdown clock to tapering

* Fed officials unanimously agreed to hold policy steady at the July FOMC meeting as expected, while also announcing two standing repo facilities to address money market pressures.

* Changes to the statement language skewed mildly hawkish, as the Committee indicated that the economy “has made progress” toward its goals to begin reducing asset purchases. But overall tone on path of rates remains pretty dovish.

* That said, the statement noted that pandemic-impacted sectors still “have not fully recovered” and Chair Powell argued in questioning that the labor market remains “a ways away” from maximum employment.

* The Delta variant risks were not highlighted implying the committee’s view that they have seen fewer economic implications from each virus wave, and that this may be the case with the Delta wave as well.

* Of note, on composition of tapering, Powell threw cold water on the idea of an early start to tapering MBS vs USTs, but indicated some support for tapering MBS purchases more rapidly than USTs.

* On inflation, Powell repeated his assessment that it has risen “notably” and cited continued bottleneck pressures, but reiterated the Fed’s expectation that inflation is likely to slow in coming months.

He also re-affirmed that despite rising, inflation expectations are still a little low vs Fed’s definition of price stability. And that Fed stands ready to deploy its tools if inflation expectations rise undesirably, but stressed that is not his base case.

* All told, we see this meeting opening the door to a possible taper announcement in December that begins reducing the purchase pace in January-March.

We don’t think Jackson Hole will be used to communicate anything important about tapering.

* Market reaction: Despite a no surprises, 10 ys UST slid further to 1.23% possibly hinting at stagflation risks or correcting Fed’s supposed mistake of being active on the idea of tapering. We maintain Treasuries appear dislocated from fundamentals .

* The Catalysts such as labor market tightening, higher supply or a renewed push for the bipartisan infrastructure package may be needed to push yields higher. We see UST yields at 1.65%+ by end-CY21 and still see steam in reflation trade/risk assets.

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