MNI STATE OF PLAY: Fed Tapering Talk Begins; 2023 Hikes Eyed

Federal Reserve Chair Jay Powell on Wednesday kicked off discussions that will lead to a winding down of the central bank's USD120 billion a month in asset purchases as officials advanced their timeline for a first interest-rate increase following the pandemic, noting conditions in the FOMC's forward guidance may be met sooner than previously anticipated.

The central bank kept benchmark interest rates just above zero but a majority of officials now see at least one interest-rate increase by the end of 2023, sooner than in March, and the risk that core inflation will be higher than forecast.

"Think of this meeting as the 'talking about talking about' meeting," Powell told reporters after a two-day FOMC gathering. "The economy has clearly made progress, although we are still a ways from our goal of 'substantial further progress'" toward full employment and 2% inflation, policymakers' bar for reducing QE.

"At coming meetings, the committee will continue to assess the economy's progress toward our goals and will give advance notice before announcing any decision" on tapering, Powell said. "The timing of course, a lot will depend on the pace of that progress, and not on any calendar."

INFLATION RISKS TILTED UP

Three more policymakers now support a rate hike next year, adding to the four who forecast doing so in March. Thirteen out of 18 officials see higher rates by the end of 2023, with a median forecast showing a 50 bp rate increase.

Markets still expect a first quarter-point rate hike by the end of 2022, with stocks slipping and dollar soaring after Powell's press conference.

As Covid-19 cases, hospitalizations and deaths have declined sharply in the past three months, Powell said, "there is more grounds for confidence, we have seen growth come in higher than we expected, we have seen strong labor demand."

Inflation has also risen rapidly above 2% in the past two months on a spike in demand and limited supply, a phenomenon "principally associated with reopening of the economy, and not with a tight labor market or tight resource constraints," Powell said. "It seems likely that these specific things that are driving up inflation will be temporary."

Longer-term inflation expectations have moved up to a range consistent with the Fed's objectives, something "gratifying to see," he added. "They are anchored and they are at a good place right now."

"Even though our forecasters do see inflation coming back down over '22 and '23 into areas that are consistent with our mandate, nonetheless the risk is something that can factor into people's thinking about appropriate monetary policy," he said. "If we see inflation moving above our goals to a level or persistently enough, we would be prepared to use our tools to address that."

Powell also expressed optimism on the labor market, in spite of slower hiring progress than expected earlier in the year.

"I'm confident that we are on a path to a very strong labor market, a labor market that shows low unemployment, high participation, rising wages for people across the spectrum," he said.

It takes time for people to find new jobs, and some are still held back by health concerns or child care responsibilities, he said. "I would expect that we would see strong job creation, building up over the summer and going into the fall."