Federal Reserve Chairman Jerome Powell, shown in December, isn't expected to indicate a tapering of the central bank's bond-buying program.
POOL/AFP via Getty ImagesThe Federal Reserve’s policy-setting arm won’t be changing interest rates or formally updating its economic forecasts when it concludes its two-day meeting Wednesday.
That, however, doesn’t mean there won’t be anything lacking for investors to digest. Wall Street expects Fed Chairman Jerome Powell to acknowledge recent economic data that by nearly all measures shows the U.S. economy is recovering much faster than expected, with everything from job gains and retail sales to the housing market booming as fiscal and monetary stimulus remains aggressive.
Ahead of the Federal Open Market Committee’s updated statement due at 2 p.m. Eastern time Wednesday, followed by Powell’s press conference at about 2:30, here’s a rundown of what to watch.
Economic upgrade: The pace of economic recovery has sped up since the Fed’s rate-setting arm, the FOMC, last met in March. The main development since then, economists at Citi say, is another month of strong data including 916,000 in rehiring during March and a 9.8% jump in retail sales in March versus February as many households received another round of checks and vaccination rates rise.
Data released Tuesday underpin expectations for a more upbeat assessment. Consumer confidence in April jumped to the highest point since the pandemic began, prompting BMO Capital’s Ian Lyngen to ask, “whatdemic?”
In March, the FOMC’s statement said that “activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak.” Investors should look for brighter language in the April statement as the recovery has gained momentum since March—especially in areas hit hardest by the pandemic.
“Powell recently acknowledged that the economy has inflected, and now the statement has to do the same,” say Jefferies economists Aneta Markowska and Thomas Simons.
Inflation acknowledgement: Markowska and Simons say the FOMC’s inflation assessment also needs an overhaul. The March statement said “inflation continues to run below 2%,” but that is no longer the case.
Earlier this month, the Labor Department said the consumer price index rose 2.6% in March from a year earlier, and while Powell will continue to make the case that hotter inflation is temporary and largely the result of easy year-over-year comparisons, a sharp 0.6% month-over-month increase in the CPI muddies that argument.
At the same time, prices across the U.S. economy from lumber to agricultural commodities are surging while home prices are at a new 15-year high.
“In addition to language in the statement, we expect Chair Powell to repeat the now familiar rhetoric that upcoming above 2% year-on-year inflation readings will prove transitory,” economists at Citi say.
But what will be particularly interesting, they say, is any guidance Powell gives on what could constitute an inflation outcome that would necessitate a policy reaction. The economists at Citi remind investors of recent comments from the Fed’s vice chairman, Richard Clarida. If inflation at the end of 2021 is not below mid-2021 readings, he said, the FOMC would need to reassess the persistence of inflationary pressure.
Looking ahead, investors should watch shelter prices for signals over the pace of inflation and future rate policy. “We continue to think it will take at least several of months of, for instance, stronger shelter inflation readings to provoke a change in Fed inflation views,” Citi says. Shelter prices have been rising since February.
Taper talk: The main hawkish risk coming out of this week’s FOMC meeting would be an earlier-than-expected indication that the time to taper a $120 billion-a-month bond-buying program is approaching, the Citi economists say. But they and most other Fed watchers across Wall Street say it’s probably too soon for taper talk.
Investors should keep an eye on Powell’s adjusted unemployment rate, which includes laid off workers incorrectly classified as “employed but not at work” in addition to those who have recently dropped out of the labor force (i.e., those who have stopped looking for work). As of March, that adjusted rate had declined to 9.1%, which is still only about a tenth of the way toward maximum employment, Markowska and Simons note.
Economists at Goldman Sachs believe the FOMC will start hinting at tapering in the second half of this year, and then will begin tapering bond buys in early 2022. Their working assumption: the pace of tapering will be $15 billion per FOMC meeting, meaning it would take one year to complete.
“After that, we think the FOMC will want to pause to take stock of the impact of tapering for at least one and ideally two quarters, putting rate hikes on the table around mid-2023,” the Goldman economists say. That seems roughly consistent with Boston Fed President Eric Rosengren’s recent comment that “we’re two years away from when [liftoff] likely is going to become a much more important question,” Goldman adds.
IOER adjustment: The Jefferies economists say a more pressing decision facing the FOMC is what to do about the downward pressure on short-term rates. Minutes from the March put an increase in the interest rate on excess reserves, or IOER, on the table. “Should undue downward pressure on overnight rates emerge, it might be appropriate to implement adjustments to administered rates at upcoming meetings or even between meetings to support effective policy implementation and ensure that the federal funds rate remains well within the target range,” the March minutes said.
Consequently, there is some speculation that the Fed might lift the IOER at its meeting this week. Markowska and Simons put odds of an IOER hike at less than 50%.
Write to Lisa Beilfuss at lisa.beilfuss@barrons.com
"here" - Google News
April 28, 2021 at 01:14AM
https://ift.tt/3xvcnZJ
Taper Talk? Inflation Outlook? Here Are 4 Things to Watch in Fed's Policy Update - Barron's
"here" - Google News
https://ift.tt/2z7PfXP
https://ift.tt/2Yv8ZPx
No comments:
Post a Comment