Casey Wagner

<div id="highlights-block_61ba3f85b5f17" class="highlights">
 <ul>
 <li>The Fed will cut bond purchases by twice as previously suggested</li>
 <li>The hawkish turn is due to improvements in the labor market and growing concerns over inflation </li>
 </ul>
 
</div>



In one of the most hawkish moves in recent history, the Federal Reserve will speed up its asset purchase tapering timeline in response to high inflation and an improved labor market, a policy <a href="https://www.federalreserve.gov/monetarypolicy/files/monetary20201216a1.pdf" target="_blank" rel="noreferrer noopener">statement</a> from the central bank revealed Wednesday.   



Policymakers have elected to cut bond purchases by twice as much as previously announced. If this new tapering pace is maintained, the pandemic-era program that saw the central bank purchase assets at a rate of $120 billion a month will end in March 2022.



“We are phasing out our purchases more rapidly because with elevated inflation pressures and a rapidly strengthening labor market, the economy no longer needs increasing amounts of policy support,” Fed Chairman Jerome Powell said during a press conference Wednesday following the conclusion of the two-day Federal Open Market Committee (FOMC) meeting.&nbsp;



Inflation has exceeded the Fed’s target of 2% “for some time,” the policy statement noted. Consumer prices rose 6.4% over the year in November, marking the fastest increase in decades. The FOMC revised its median projection for 2022 inflation to 2.6%, up from 2.2% in September.&nbsp;



“We are committed to our price stability goal,” Powell said. “We will use our tools both to support the economy and a strong labor market, and to prevent higher inflation from becoming entrenched.” &nbsp;



The new taper timeline positions the central bank to raise interest rates earlier than expected if inflation persists.&nbsp;



Economic <a href="https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20211215.pdf">projections</a> released with the statement show that Fed officials anticipate three increases of a quarter-point each to the benchmark federal funds rate in 2022. Forecasts from <a href="https://cms.blockworks.co/powell-guidance-around-fed-tapering-could-come-at-next-meeting/" target="_blank" rel="noreferrer noopener">September</a> showed that half of Fed officials saw no need for rate increases at all in 2022. Interest rates have been kept near-zero since March 2020. 



When asked about long and variable lags, a common concern about the delay between policy changes and impact on the economy and real-world prices, Powell was unconcerned. 



“I do think that in this world where everything is new, and the global financial markets are connected together, financial conditions can change very quickly,” he said. “When we communicate about what we&#8217;re going to do, the markets move immediately to that.”



Equities and digital asset markets reacted positively to the news. The S&amp;P 500 and Nasdaq were both up about a quarter of a percent as of 2:48 pm EST. Bitcoin and ethereum also ralled, up 3.5% and 4.6%, respectively.



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Fed Gets Hawkish; Doubles Taper, Signals Three Rate Hikes in 2022

<div id="highlights-block_61a6566bd7179" class="highlights">
 <ul>
 <li>Managing inflation expectations has proved challenging, and prices may remain elevated, even as the rate of inflation recedes</li>
 <li>Powell faced tough questioning from some senators as the Fed considers whether to accelerate plans to taper its regular asset purchases</li>
 </ul>
 
</div>



The Federal Reserve has a different definition of the term ‘transitory inflation’ than most Americans, Chairman Jerome Powell said Tuesday, suggesting that the word be “retired.”&nbsp;&nbsp;



Powell appeared alongside Treasury Secretary Janet Yellen before the Senate banking, housing and urban affairs committee about the Coronavirus Aid, Relief and Economic Security (CARES) Act Tuesday for the first of two days of testimony.&nbsp;



Lawmakers had a series of tough questions for the two officials, ranging from stablecoin regulation to bond tapering and inflation. Senator Pat Toomey, a Republican from Pennsylvania, expressed frustration with Powell’s long-time insistence that inflation is “transitory.”&nbsp;



“Everything is transitory. Life is transitory,” the senator said.&nbsp;



Powell responded by redefining the word that has ruled headlines for the better part of the year.&nbsp;



Most consider ‘transitory,’ in the context of inflation, to mean that higher prices will be short-lived, Powell said, but the Fed believes that ‘transitory’ means that inflation will not lead to permanent economic damage. It is a good time “to retire” the term, Powell said.&nbsp;



Nancy Davis, founder of Quadratic, believes Powell&#8217;s comments are overdue.&nbsp;



“He’s late to remove the word ‘transitory’ in my opinion. I think it has been very clear for some time now that inflation is impacting the real economy,” she said Tuesday during a question and answer session with Bloomberg’s TOPlive.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“In terms of its impact on markets, I think it means that the Fed is going to continue tapering and removing liquidity from financial markets. That means the potential for additional market volatility.”</blockquote>



Powell’s comments come after he insisted for months that higher prices would be fleeting.&nbsp;



“Policymakers and analysts generally believe that as long as longer term inflation expectations remain anchored, policy can and should look through temporary swings in inflation,” Powell said in August during his Jackson Hole policy forum address.&nbsp;



Prices have risen 4.4% year-over-year since September. The Fed’s inflation target is 2% annually. Powell has since insisted that higher inflation is due to supply chain issues and bottlenecks as a result of the pandemic.&nbsp;



When pressured on Tuesday to explain how experts’ inflationary predictions were so off, Powell again pointed to ‘unpredictable&#8217; supply chain issues.&nbsp;



“We didn&#8217;t predict the supply side problems, and those are really [non-]linear and hard to predict,” Powell said. “That’s really what we missed, and that’s why professional forecasters had much lower expectations for inflation.”&nbsp;



If inflation pressures persist, Powell said, it may be appropriate to hasten the pace of asset purchase tapering, which the Fed announced would begin this month.&nbsp;



“It is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at our November meeting, perhaps a few months sooner,” he said Tuesday.&nbsp;



The Fed’s next meeting is scheduled for December 14 and 15. President Biden <a href="https://cms.blockworks.co/jerome-powell-secures-second-term-as-inflation-persists/" target="_blank" rel="noreferrer noopener">recently reappointed Powell</a> to Chair the Fed Board of Governors for a further four years. He still faces confirmation in the Senate.



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<hr class="wp-block-separator"/>

Powell: We Can Retire the Term ‘Transitory Inflation’

<div id="highlights-block_6128f6810fae5" class="highlights">
 <ul>
 <li>Powell stays on script that inflation will be transitory</li>
 <li>Rate hikes are unlikely to come in the near future </li>
 </ul>
 
</div>



Federal Reserve Chairman Jerome Powell said that the central bank may start to scale back its asset purchases this year during his virtual Jackson Hole policy forum address Friday. He also stressed that the recent inflation surge will fade in time.&nbsp;



During the July meeting, “I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace,” Powell said Friday, referring to the Fed’s $120 billion monthly asset purchase pace.&nbsp;



Powell noted that the economy has progressed since <a href="https://cms.blockworks.co/most-fed-officials-say-inflation-goal-met-tapering-to-start-this-year/" target="_blank" rel="noreferrer noopener">July</a> in terms of employment numbers, but the rise of the delta variant may pose additional challenges. 



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the delta variant,” Powell said. “We will be carefully assessing incoming data and the evolving risks.”</blockquote>



Stocks gained on the news. The energy, materials and communication sectors pushed the S&amp;P 500 higher Friday after closing lower on Thursday.&nbsp;



“The market is taking Powell as slightly dovish, and then it seemed a bit confusing because he did say that the Fed is going to taper QE starting this year, but we always expected that,” said Tom Essaye, founder of Sevens Report Research. “That&#8217;s what everybody&#8217;s expected and priced in, instead what Powell did was spend most of his speech pushing back on the idea that inflation is a problem.”



<figure class="wp-block-image size-full"><img loading="lazy" decoding="async" width="758" height="578" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/08/Screen-Shot-2021-08-27-at-10.13.53-AM.png" alt="Inflation chart" class="wp-image-7207" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/08/Screen-Shot-2021-08-27-at-10.13.53-AM.png?w=758 758w, https://blockworks-co.imgix.net/wp-content/uploads/2021/08/Screen-Shot-2021-08-27-at-10.13.53-AM.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/08/Screen-Shot-2021-08-27-at-10.13.53-AM.png?w=337 337w, https://blockworks-co.imgix.net/wp-content/uploads/2021/08/Screen-Shot-2021-08-27-at-10.13.53-AM.png?w=342 342w, https://blockworks-co.imgix.net/wp-content/uploads/2021/08/Screen-Shot-2021-08-27-at-10.13.53-AM.png?w=287 287w, https://blockworks-co.imgix.net/wp-content/uploads/2021/08/Screen-Shot-2021-08-27-at-10.13.53-AM.png?w=80 80w" sizes="(max-width: 758px) 100vw, 758px" /></figure>



Powell <a href="https://cms.blockworks.co/fed-chair-powell-economy-depends-on-covid-path/" target="_blank" rel="noreferrer noopener">continued</a> to insist that today’s 4% inflation will not be lasting, also claiming that today’s wage increases are unlikely to impact inflation significantly. 



“We will continue to monitor this carefully, policymakers and analysts generally believe that as long as longer term inflation expectations remain anchored, policy can and should look through temporary swings in inflation,” Powell said.&nbsp;



There will not be any interest rate changes, Powell said, until the economy reaches “conditions consistent with maximum employment,” and inflation has reached 2%.&nbsp;



June’s quarterly projections revealed that seven of 18 Federal Open Markets Committee participants believed raising rates next year would be appropriate. Thirteen expected rate increases would be appropriate by 2023.&nbsp;



“I agree that 4% <a href="https://cms.blockworks.co/powell-turns-to-lumber-to-prove-inflation-is-transitory/" target="_blank" rel="noreferrer noopener">Inflation</a> is transitory, I think that some of what we are seeing is not to go away,” said Essaye. “I think that inflation is going to run between 2% and 3% now pretty consistently, which isn&#8217;t necessarily a problem, but it&#8217;s also something we&#8217;re not used to.”  



Powell’s address comes as President Biden weighs whether or not to nominate the head of the central bank for a second term.



Want more investor-focused content on digital assets? <a target="_blank" href="https://cms.blockworks.co/events/digital-asset-summit-2021-2/" rel="noreferrer noopener">Join us</a> September 13th and 14th for the Digital Asset Summit (DAS) in NYC. Use code ARTICLE for $75 off your ticket. <a target="_blank" href="https://cms.blockworks.co/events/digital-asset-summit-2021-2/" rel="noreferrer noopener">Buy it now</a>.

Powell: Tapering Might Begin This Year, Rate Hike Far Off

<div id="highlights-block_612680654941f" class="highlights">
 <ul>
 <li>Federal Reserve Chairman Jerome Powell is set to speak this morning at 10AM EST </li>
 <li>Atlanta Fed President says tapering conditions have nearly been met</li>
 </ul>
 
</div>



Federal Reserve Bank of Atlanta President Raphael Bostic, speaking ahead of the Fed’s annual Jackson Hole policy forum, said he would approve of the central bank starting to cut back on asset purchases if United States employment numbers continue to look promising.&nbsp;



Fed Chairman Jerome Powell is set to speak Friday morning following the conference, hosted by the <a href="https://www.kansascityfed.org/research/jackson-hole-economic-symposium/economic-symposium-conference-proceedings/" target="_blank" rel="noreferrer noopener">Kansas City </a>Fed virtually for the second consecutive year due to the rise in coronavirus cases around the country. 



“Powell says that the scope, or the direction of, tapering will be based on how COVID is going and the fact that they&#8217;re doing it virtually and they actually said ‘we&#8217;re doing it because of the increase in people sick’ is an indication that if the Fed is concerned about having everyone together,” said Steve Van Metre, founder of Steve Van Metre Financial. “They&#8217;re probably not going to taper.”&nbsp;



Investors and analysts are watching to see if Powell gives any indication of when the Fed’s $120 billion/month asset purchases may start to slow.&nbsp;



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“A few weeks ago, I would have said with higher probability that I think Powell would announce a taper at the Jackson Hole event,” said Lyn Alden, founder of Lyn Alden Investment Strategy. “With the rise in the delta variant, and the Jackson Hole event going virtual because of it, they have some narrative cover to delay tapering a bit. Now I&#8217;d say it&#8217;s 50/50. “ </blockquote>



The Fed’s <a href="https://cms.blockworks.co/most-fed-officials-say-inflation-goal-met-tapering-to-start-this-year/" target="_blank" rel="noreferrer noopener">July meeting</a> minutes revealed that officials mostly agree that tapering conditions should likely be met by the end of this year. Central bankers however have different ideas of how best to go about the taper process. 



In terms of bond purchases, most participants “saw benefits in reducing the pace of net purchases of Treasury securities and agency mortgage-backed securities proportionally,” the minutes revealed. Other members expressed interest in reducing mortgage-backed security purchases more quickly than Treasuries.



“The challenge for the Fed now is that inflation is running hot, but economic growth is declining in rate of change terms,” said Alden. “If they taper, they&#8217;ll technically be tapering into a slowing economy; however, they are so loose now, that simply reducing their rate of asset purchases, although is tightening in relative terms, is still quite dovish in the grand scheme of things. It&#8217;s not the same as raising rates or performing quantitative tightening.” 



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Fed Watch: Bostic Says ‘Very Close’ to Taper Conditions

<div id="highlights-block_611d5d542996d" class="highlights">
 <ul>
 <li>Central bank asset purchase tapering may start this year, The Federal Reserve Open Markets Committee minutes show </li>
 <li>Committee members raised concerns about stablecoins and their lack of transparency </li>
 </ul>
 
</div>



The Federal Reserve may start tapering asset purchases and scale back its easy-money monetary policies this year, <a href="https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20210728.pdf" target="_blank" rel="noreferrer noopener">minutes</a> from the July Federal Open Markets Committee (FOMC) meeting show.&nbsp;



Most Fed officials said that the central bank’s inflation expectations have been sufficiently met and there has been progress made toward reducing unemployment.&nbsp;



“All participants assessed that the economy had made progress toward the Committee’s maximum-employment and price-stability goals since the adoption of the guidance on asset purchases in December,” the minutes read. “Most participants judged that the Committee’s standard of substantial further progress toward the maximum-employment goal had not yet been met.” 



In terms of tapering execution, committee members, <a href="https://cms.blockworks.co/fed-chair-powell-economy-depends-on-covid-path/" target="_blank" rel="noreferrer noopener">who met in late July</a>, vary in how they think about the timing, pace and type of tapering.



In terms of bond purchases, most participants “saw benefits in reducing the pace of net purchases of Treasury securities and agency mortgage-backed securities proportionally,” the minutes revealed. Other members expressed interest in reducing MBS purchases more quickly than Treasuries.



“Several participants commented on the benefits that they saw in reducing agency MBS purchases more quickly than Treasury securities purchases, noting that the housing sector was exceptionally strong and did not need either actual or perceived support from the Federal Reserve in the form of agency MBS purchases or that such purchases could be interpreted as a type of credit allocation,” the minutes read.



<h3 class="wp-block-heading">The risk of stablecoins </h3>



Committee members also discussed stablecoins in July. Officials remarked that these &#8220;new financial arrangements&#8221; lack structural maturity and exist within an &#8220;underdeveloped regulatory framework.&#8221; 



&#8220;A few of these participants highlighted the fragility and the general lack of transparency associated with stablecoins, the importance of monitoring them closely, and the need to develop an appropriate regulatory framework to address any risks to financial stability associated with such products,&#8221; the minutes noted. 



Fed Chairman Jerome Powell has <a href="https://cms.blockworks.co/powell-a-cbdc-would-make-cryptocurrencies-obsolete/">said in the past</a> that the establishment of a central bank-backed digital currency would make the market less reliant upon stablecoins. 



“You wouldn’t need stablecoins, you wouldn’t need cryptocurrencies if you had a digital US currency,” Powell said during testimony before the House financial services committee in July. “I think that’s one of the strong arguments in its favor.”



The FOMC meets next in late September. Investors are also awaiting the Jackson Hole Economic Policy Symposium on August 26-28, when central bankers, finance ministers, academics, and financial market participants from around the world will meet to discuss issues related to economic policy.



This story was updated at 3:42PM EST. 



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