27 Apr

FOMC Policy Meeting: Has The Economy Improved Enough?

April 27, 2021

By Orbex

Fed Chairman Jerome Powell is in a somewhat difficult position. This is likely to be expressed in the statement from the FOMC policy meeting and the subsequent press conference.

There is a reason that he’s been making public statements much more often over the last few weeks. The Fed has to manage a somewhat complicated policy route over the next few months.

To get it out of the way, the majority of analysts don’t expect there to be any policy change by the Fed at the meeting.

Expectations are for interest rates to remain where they are, and for asset purchases to be kept at the current level.

So, we can expect the market reaction to be muted – as long as Powell can manage expectations.

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Where we are going over where we are

Last month’s jobs report was great, and the latest economic data shows that consumers are coming back to the market.

With the economy growing, it becomes increasingly obvious that the Fed will step back from stimulus at some point. However, that expectation can hurt economic growth as the market adjusts to expectations of higher rates.

With the Fed seeking to support the economy as much as they can, they want to avoid any appearance that they are getting ready to change policy. On the other hand, they can’t not acknowledge the better economic data, because that also could depress markets.

So, the expectation is for the FOMC to provide a more upbeat outlook in the statement, but at the same time emphasize that more needs to be done to support the market.

Powell is again expected to emphasize this point in the presser.

The yields are the key

Following the approval of the last stimulus bill, bond yields started to move higher as traditional economics forecast increased inflation.

Analysts reassessed when the Fed was likely to raise rates. But higher bond yields imply increased cost of credit and could weigh on the economy. Powell came out repeatedly over the next couple of weeks to affirm that the Fed was far from raising rates, and yields finally settled down.

As long as Powell managed to keep that line of “things are improving, but not enough to consider tapering”, we ought to see little reaction in the market.

But reporters are expected to badger him about where asset purchases are going. Powell is likely to try to avoid even using the word “taper” (it might set off some of the algos).

Where things are going

The consensus of expectations is that the Fed won’t start tapering off its asset purchases until March of next year (with a potential first rate hike in March of 2023).

Any policy change in the meantime is expected to be “technical”. So, the thinking is that the Fed will try to stay on the sidelines of the economy for the next several months. But, ironically, will require more public appearances and commentary to reassure investors that’s the case.

The three criteria that need to be met before the Fed is expected to consider tapering are:
– Job market has reached “full employment”
– Inflation is at 2%
– Inflation is likely to exceed 2% for an extended period of time.
By Orbex


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