Morgan Stanley: Putting Progress in Motion

Morgan Stanley saw the meeting as a "success" in terms of not rocking the boat" "but with notable nuances that on balance provided a less dovish outcome."

• The single most important change in the statement: "Since December 2020, the economy has made 'progress' toward the Fed's goals. Should progress continue, the Fed can now convey that it could be appropriate to taper asset purchases 'in coming meetings', followed by 'in coming months', then 'soon it will be appropriate'. This step function serves two purposes. First to provide clearer communication around how close the Fed is to meeting the requirements to taper, and second to provide notice to the markets "far in advance" of the start to taper."
• MS expects further evolution of the "progress" language in Sep as a heads up well before tapering.
• Re MBS vs Tsys: "there does appear to be some emerging consensus ... that Treasuries and MBS should not be treated differently during the taper."
• MS: "The minutes of this meeting may end being more exciting than the actual outcome of the meeting itself, insofar as we will learn more via the quantitative language that helps indicate where participants stand in terms of the taper debate, where Chair Powell vis-à-vis those other participants, and how close to completing the preparatory discussions the FOMC has come."
• Future action: Official taper announcement in March 2022, but risk that Fed acts before the end of 2021. $10B Tsy/$5B MBS, with optionality to speed up / slow down based on data.