FOMC minutes release confirms that tapering will likely be announced at the November meeting
The minutes of the September 21st – 22nd Federal Open Market Committee (FOMC) meeting, supported the view that a reduction in the pace of asset purchases (QE tapering), will likely be decided in the upcoming meeting (November 3rd) and the first step could come as soon as in mid-November or mid-December.
Regarding the pace, the minutes corroborated the view for a reduction by $10 billion for Treasury Securities and $5 billion for agency mortgage-backed securities, each month, from a current pace of $80 billion and $40 billion, respectively per month, ending large-scale net asset purchases by mid-2022. Several participants favored a faster pace of tapering.
According to the IMF, global real GDP growth is expected at +5.9% in 2021 (from +5.8% three months ago) and +4.9% in 2022 (unchanged).
Significant, albeit mutually offsetting, revisions took place at the regional level. Indeed, the estimated annual real GDP growth in the US was downgraded by 1.0 pp to +6.0% for 2021, due to (i) inventory drawdowns on account of supply chain disruptions and (ii) the easing of momentum for private consumption in recent months due to the Delta variant.
For 2022, the respective estimate was up by +0.3 pps to +5.2% assuming c. $4 trillion of fiscal spending over the next 10 years stemming from the bills which are currently under consideration in the US legislature ($1.2 tn infrastructure bill and the rest coming from anticipated legislation regarding social and climate policies). Note, however, that President Biden has suggested a potential scaling back to c. $3 trillion, for a compromise.
On the other hand, the projections for economies with a high degree of dependence on tourism were upgraded, due to the better-than-expected performance of that sector during the summer (e.g. Italy | +0.9 pps to +5.8% yoy for 2021). Upward revisions for major commodity exporters also took place for 2021 (e.g. Russia: +0.3 to +4.7%), on the back of rising commodity prices.
The IMF deems the balance of risks around its baseline growth scenario, as tilted to the downside, mainly stemming from the possibility of more virulent SARS-CoV-2 variants taking hold, before widespread vaccination is reached (36% of the global population is fully vaccinated).
In addition, more persisting price increases (versus a baseline scenario for inflation to normalize in the course of 2022), if pandemic-induced supply-demand mismatches are maintained for more than expected, carry the risk of feeding through to higher inflation expectations. In turn, that development could result in higher actual inflation (as wages reset in line with higher expectations).
In such a case, a faster-than-anticipated monetary policy normalization would likely be warranted in advanced economies, which could lead to a sudden tightening of global financial conditions and a rapid repricing of financial assets given stretched valuations in some market segments.