The July FOMC meeting offered little new information. While the FOMC made some changes to the language in its post-meeting statement, noting that “the economy has made progress toward” its employment and inflation goals since December, it balanced this with language stating that the FOMC “will continue to assess progress at upcoming meetings.” In addition, Chair Powell said that the labor market still has “a long way to go” and “some ground to make up,” and that “we are a little way off from having made further substantial progress.”

On inflation, Powell reiterated his assessment that it has risen “significantly” and cited ongoing bottleneck pressures, but he reiterated the Fed’s expectation that inflation is likely to slow in the coming months.He also reaffirmed that the Fed is ready to deploy its tools if inflation expectations rise undesirably, but emphasized that this is not its baseline scenario.

The statement also expressed somewhat less concern about the virus’s impact on the economy, which was somewhat surprising given the fivefold increase in new cases since the June meeting.However, Powell balanced this out during his press conference by acknowledging that the Delta variant could cause people to avoid high-contact activities or delay their return to the labor market.

Is the countdown to tapering asset purchases beginning? Powell noted that the FOMC discussed the pace and composition of the tapering at its July meeting but did not reach a final decision. We still believe a reduction in the balance sheet is more likely in 2022. (With a more formal announcement of the tapering plan in December.)

Overall financial conditions remain accommodative, reflecting in part the policy measures taken to support the economy and the flow of credit to U.S. households and businesses. This, combined with exceptionally low interest rates and strong corporate earnings (see the following note), should continue to support the strong performance of risk assets.