The main tapering question concerns PACE, but this probably isn’t something the Fed will communicate definitively until Sept (investors shouldn’t look for much color on pace at Jackson Hole). We are assuming $15B/month, which would have QE conclude around June of 2022, although the odds of a faster drawdown are rising (if the Aug jobs report on 9/3 is a blowout, the Fed could easily have QE wrapped up by Mar of 2022).

To the extent monetary officials are growing more anxious about the economy, this will probably manifest itself in the form of a SLOWER taper (the odds of NO taper are ~10%). Right now, we’re penciling in $15B/month starting in Dec and that still seems the most appropriate scenario even with the latest Delta variant setback and the recent softening in growth momentum (odds ~60%). A more bullish/dovish scenario would involve a $5-10B taper increment (that still begins in Dec) – this removes the overhanging “when will they taper” question but only cuts QE by a de minimis amount (the odds of this aren’t zero, but we don’t think they’re higher than 20% or so). A few weeks ago, investors had feared an accelerated taper (i.e. $30B/month), but that’s now very unlikely (odds ~10%). Keep in mind, Powell on Friday at Jackson Hole probably won’t provide any of the tapering specifics – those will instead be provided on Sept 22 at the next meeting.

Given that the market already assumes a 2021 taper, the bigger monetary wildcard in our view will be the Sept 22 “dots”. The last dot plot forecast two hikes by the end of 2023 – we see that moving to three hikes on 9/22, although the distribution of them is uncertain (there could be one hike in 2022 or three in 2023).

Investors are penciling in a doubling of the taper pace to $30B along with two hikes for the 2022 dot (while Powell has already essentially abandoned the word “transitory”). All that said, we don’t think an undershoot of the CPI [release tomorrow] should really be considered a major positive. Even a +6.3% headline or +4.5% core, both far below the St consensus for Nov, would hardly warrant an “all clear” declaration from the Fed, especially since inflation is now the single biggest concern among American households (according to a new poll), which makes the topic very much of interest to Congress (since Powell still needs to get confirmed for another term, he can’t sound unsympathetic or dismissive of all the inflation anxiety). If the Nov inflation figures were to overshoot the St consensus, it wouldn’t be shocking to see the 2022 dot reflect three hikes (or close to three) and/or have Powell signal the start of rate liftoff soon after QE concludes (if QE is set to end in March, this would make the May 4 meeting a “live” one).

Usually the Fed raises rates until they break something. And the flattening yield curve is suggesting it won’t take much to break something -- maybe just a move to 1% and we’ll start seeing breakage.

His comments are in yesterday Daily Journal shareholder Q&A, specifically in minutes 53-56 in the attached video recording, in response to the question, "What are your current thoughts on the inflationary environment. Please compare and contrast it to the 1970s."

This is a most unfortunate situation in the face of a possible stagflationary shock that would weaken global growth and give another impetus to inflation should a more significant armed conflict erupt between Russia and Ukraine — one that would likely lead to a spike in prices of energy and some other commodities, a proliferation of economic and financial sanctions, and a decline in both household and business confidence. It would be even worse if the functioning of financial markets were to be stressed — regrettably, a material risk for at least three important reasons . . .

The head of Volkswagen, Europe’s largest carmaker, has warned that a prolonged war in Ukraine risks being “very much worse” for the region’s economy than the coronavirus pandemic. The interruption to global supply chains “could lead to huge price increases, scarcity of energy and inflation”, Herbert Diess, chief executive of the German carmaker, told the Financial Times. “It could be very risky for the European and German economies.”