Top News  Shutterstock When the Federal Open Market Committee announces its monetary policy decision this afternoon, there's scant chance the Fed will raise rates or make significant changes to its asset purchases which are totaling $120B/month. Rather, investors and economists will be focused on the Fed's Summary of Economic Projections (SEP), specifically with an eye to whether any Fed officials move up their expectations for a rate hike in 2023. This will also mark the first real test of the central bank's adherence to its new framework.
Backdrop: Last summer, the Fed committed to letting inflation run above its 2% average for a time to offset years of inflation lagging its target. That change means the Fed won't raise rates until the data shows inflation is on its way to exceeding its target for a considerable amount of time. Chairman Jerome Powell has said in many statements that the central bank will be "patient," or in other words, it doesn't want to slow the recovery by jumping the gun and raising rates too early (that's what happened after the 2008 financial crisis).
To review December's SEP, only one of the 17 Fed officials expected a rate increase next year, and only five of them projected a hike in 2023 as seen in the Fed's so-called dot plot. The December SEP called for median real GDP growth of 4.2% in 2021, 3.2% in 2022 and 2.4% in 2023; median unemployment projection was at 5.0% in 2021, 4.2% in 2022 and 3.7% in 2023. So back in December, the Fed members didn't expect unemployment return to the pre-pandemic level of 3.5% for the next three years and core personal consumption expenditures weren't expected to rise to 2.0% until 2023.
Outlook: Since then, there have been two stimulus plans enacted - $900B in December and $1.9T in March - and investors are now more optimistic about economic growth, but also worried that inflation will surge. The latest economic projections and policy statement are scheduled to be released at 2 p.m. ET, while Powell will hold a news conference 30 minutes later, in an event that could prove tricky for the Fed chief.    | | Top News Shutterstock When the Federal Open Market Committee announces its monetary policy decision this afternoon, there's scant chance the Fed will raise rates or make significant changes to its asset purchases which are totaling $120B/month. Rather, investors and economists will be focused on the Fed's Summary of Economic Projections (SEP), specifically with an eye to whether any Fed officials move up their expectations for a rate hike in 2023. This will also mark the first real test of the central bank's adherence to its new framework.
Backdrop: Last summer, the Fed committed to letting inflation run above its 2% average for a time to offset years of inflation lagging its target. That change means the Fed won't raise rates until the data shows inflation is on its way to exceeding its target for a considerable amount of time. Chairman Jerome Powell has said in many statements that the central bank will be "patient," or in other words, it doesn't want to slow the recovery by jumping the gun and raising rates too early (that's what happened after the 2008 financial crisis).
To review December's SEP, only one of the 17 Fed officials expected a rate increase next year, and only five of them projected a hike in 2023 as seen in the Fed's so-called dot plot. The December SEP called for median real GDP growth of 4.2% in 2021, 3.2% in 2022 and 2.4% in 2023; median unemployment projection was at 5.0% in 2021, 4.2% in 2022 and 3.7% in 2023. So back in December, the Fed members didn't expect unemployment return to the pre-pandemic level of 3.5% for the next three years and core personal consumption expenditures weren't expected to rise to 2.0% until 2023.
Outlook: Since then, there have been two stimulus plans enacted - $900B in December and $1.9T in March - and investors are now more optimistic about economic growth, but also worried that inflation will surge. The latest economic projections and policy statement are scheduled to be released at 2 p.m. ET, while Powell will hold a news conference 30 minutes later, in an event that could prove tricky for the Fed chief. | |
| Central Banking U.S. bond yields and the dollar could jump if the FOMC's post-meeting statement and Powell's press conference are not deemed dovish enough, but the opposite is also true. Stocks could take off with renewed vigor if runaway inflation fears are put to rest and the Fed strongly commits to an easy money policy stance. Rising interest rates have been an overhang for equities in recent weeks, specifically the tech sector. The jump in yields has forced a shift into value stocks from growth, pushing the Dow Jones and S&P 500 to hover near record highs.
Bank of America's economic team is calling the meeting "one of the most critical events for the Fed in some time." Traders are responding in kind, with stock futures strongly hugging the flatline overnight as they wait to hear more from the Fed before making any big decisions, while the 10-year Treasury yield notched a fresh 13-month high at 1.64%. Let's look at the possible outcomes...
Status quo: "We expect Powell to note the FOMC has the tools to intervene if the bond market becomes disorderly or constrains the economic recovery," wrote analysts of Commonwealth Bank of Australia. "But we expect Powell to push back against talk of policy tightening because of the large amount of labor market slack."
Calming fears: "It's Nirvana for the markets. The Fed is going to keep rates extremely accomodative," said Joseph LaVorgna, former White House chief economist. "The Fed's modus operandi has been time and time again to get inflation higher and now they want to run it hot for a period of time."
No immediate concern: "Powell's been pretty sanguine about the whole increase in yields. We think he'll maintain that stance," said Wells Fargo Securities' Michael Schumacher. "Our view is he will not really try to slow it down."
Reviving Operation Twist: That's where the Fed buys longer-dated bonds and sells shorter-dated bonds to bring down rates at the longer end. "I have a hunch that what was known as Operation Twist may be in our future," legendary bond trader Bill Gross declared. "We might have even had Operation Twist in the last two weeks, but that might just be conjecture on my part."
Expectations are wrong: "Whether it's negative rates or rates which are barely positive, I think that over the course of the next 18 months, we should expect to see a high likelihood that we end up with significantly lower long-term rates than we have today," said Scott Minerd, Guggenheim's global chief investment officer. | |
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