Morning Report: The Fed signals that tapering will begin this year.

Vital Statistics:

  Last Change
S&P futures 4,411 27.2
Oil (WTI) 72.02 0.19
10 year government bond yield   1.36%
30 year fixed rate mortgage   3.07%

Stocks are higher this morning after the Fed maintained interest rates. Bonds and MBS are down.


The FOMC statement was pretty much in line with expectations. The Fed noted that the economy had continued to strengthen, although some of the industries hit hardest by the disease have seen their recoveries slow down. The Fed is sanguine with letting inflation run hot in the near term, in order to bring the average up to their target. On the subject of tapering, here is what they had to say:

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. If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.

The economic projection for GDP was lowered from 7% to 5.9% for 2021, which was the biggest change in the projections. 2022 GDP was bumped up from 3.3% to 3.8%, while inflation and unemployment projections for 2021 were increased.

The dot plot showed the FOMC basically coming into agreement with the Fed Funds futures. A few additional members saw a rate hike in 2022, and we are now more or less seeing a 50 / 50 chance of a rate hike next year.


Overall, I think the takeaway is that the first reduction in asset purchases probably happens this year, and the Fed views this current deceleration in growth as a temporary blip that will add to growth next year.


Initial Jobless Claims ticked up to 351k last week as the Great Resignation continues. As we saw in FedEx’s numbers yesterday, labor shortages are taking a toll on profitability. FedEx’s woes probably translate to a whole host of other businesses too. Third quarter earnings may disappoint for a lot of companies.


The Fed’s plans may also be moot given the Evergrande situation in China. Evergrande is a distressed property developer in China that has something like $300 billion in liabilities. While the government so far hasn’t made moves to bail out the company, the reverberations may still impact the Chinese real estate market, especially residential real estate.

As we saw in Japan in the late 80s, and the US during the bubble, burst residential real estate bubbles are something that develop a life of their own, and it is hard to manage the fallout. I read somewhere that real estate accounts for 29% of China’s GDP, compared to about 6% in the US, and real estate assets account for 40% of Chinese household assets. When that bubble bursts, it will be ugly.

3 Responses

  1. First paragraph of the story:

    President Biden and former President Trump are statistically tied when it comes to their favorability among U.S. voters, according to a new Harvard CAPS/Harris Poll survey shared exclusively with The Hill on Monday.

    Fifth paragragh:

    Fifty-one percent of respondents now say Trump was a better president than Biden, while 49 percent prefer the White House’s current occupant, the poll shows.

    Talk about your buried lede.


    • russian trolls paid in vodka, prolly


    • These polls tend to oversample Democrats and progressives and young people and other people who are going to tend to be to the left, even if they claim to be independents or moderates. Sometimes even if they claim to be libertarian. So chances are a representative survey, were one possible, would likely be 3 or 4 points worse for Biden. But they definitely aren’t going to suggest that 55% percent prefer Trump and 44% prefer Biden.


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