Fed Quick Analysis: Powell only takes a baby step toward tapering, why the dollar could dive

Has the Federal Reserve merely kicked the can down to its next meeting? While markets had expected the world's most powerful to refrain from any hint about reducing its $120 billion/month bond-buying scheme, this July meeting may have included a longer pause than expected. It is "a ways off."

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1) Inflation is transitory

The Fed has stuck to its dovish view on inflation. Since its last meeting, all measures of prices have risen, yet the bank keeps its calm by seeing through the reopening-related factors and sticking to its projection that prices will cool off.

The word "transitory" is repeated:

The sectors most adversely affected by the pandemic have shown improvement but have not fully recovered. Inflation has risen, largely reflecting transitory factors. 

2) Covid is a risk

While inflation edged up since the Fed's last meeting, COVID-19 cases leaped roughly four-fold – and that is causing worries in Washington. The Fed acknowledges progress on vaccinations but says that "risks to the economic outlook remain." 

Even if this current wave will eventually fade away – albeit at a slower pace as vaccinations have stalled – there is a high level of uncertainty. Central banks react to uncertainty with a "wait-and-see" mode. That is what is happening now. 

3) Tapering is matter of "coming meetings

What about tapering? Here is a quote that takes the air out of those expecting a hint about reducing bond-buys already in August, when the Fed holds its Jackson Hole Symposium. Emphasis added:

Last December, the Committee indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings

The use of plural means a hint of tapering is still "a ways off" and not so close. The Fed has only taken a baby step – not a significant one – toward tapering. 

Uncertainty is something markets dislike, but pushing back the unknown timing of the Fed's tapering is good news. Fed dovishness is perhaps the biggest supporting factor for equities and the bank cast doubt about it in June, it caused some jitters. But now, stocks have room to rise and the dollar to fall. 

More Analyzing inter-market correlations to see if reflation trade is coming to an end – July 2021