The gradual shift to policy normalization appears to have begun for the Federal Reserve and some of the largest foreign central banks. The Sept. 22 FOMC official statement signaled that a November taper announcement is likely, and the updated Summary of Economic Projections (SEP) revealed a growing rift within committee participants related to the timing and aggressiveness of future rate hikes (more on that below). The European Central Bank and Bank of England followed with somewhat hawkish rhetoric as well, referencing worries over potentially "sticky" inflation. Financial markets have also been giving attention to China's economy and the likely failure of real estate giant Evergrande, looking for any signs of more systemic fallout. The budget debate in Congress also remains front and center with President Biden signing legislation on Oct. 14 temporarily raising the government's borrowing limit to $28.9 trillion, pushing off the deadline for debt default only until December.

Senate Republicans blocked House-passed legislation on Sept. 27 that would have funded the government into December and suspended the debt ceiling until the following December, after mid-term congressional elections. Republicans prefer to separate the debt ceiling suspension from the government funding legislation so that the former could be used as a negotiating tool in Democrats' larger $3.5 trillion budget reconciliation plan. Congress was able to pass short-term legislation to fund the government through early December, but the debt ceiling still looms. A technical default would obviously be a dangerous scenario, and although we have witnessed multiple debt ceiling standoffs over the last decade, even a remote possibility of a U.S. default still fosters some investor consternation, particularly from overseas buyers.

A Growing Divide

The September FOMC meeting was much anticipated for multiple reasons. First, Fed Chair Powell's Jackson Hole speech made clear that any upcoming meeting was "live" for a taper announcement, and while there was some possibility for a September announcement, the general expectation was for the committee to telegraph a decision at the next meeting (November). They did just that with both the official statement and Powell's press conference, but Powell did offer a modest surprise when he suggested that tapering would wrap up by the middle of next year. That would imply a $15 billion per month pace ($10 billion Treasury/$5 billion MBS) as opposed to the $10 billion per month pace that many were expecting.