Expectations: Fed Rate Decision

There are increasing expectations about the FOMC meeting today and tomorrow.

A lot has changed since the last meeting. The question is: how is that going to affect the Fed’s outlook?

Virtually all analysts agree that it’s too early to see a change in monetary policy. However, the latest economic data suggests it’s time for Chairman Powell to change his tune at the press conference later.

And that could get the markets riled up!

There are a couple of important issues that might be discussed.

One of the less obvious ones, because it’s more technical, might have the biggest impact: The possibility of the Fed adopting yield-curve control (YCC), which is currently being used by only Japan and Australia.

What is YCC?

Normally, the Fed sets a short-term interest rate, which is the Federal Funds Rate.

The argument is that as it’s close to zero, it has little effect on stimulating the economy. But, if the Fed buys bonds strategically to push down interest rates in a longer period (that is, push down the curve), that could have a bigger impact on the economy. It could also reduce the possibility of a recession.

Many members (and former members) of the FOMC have commented on the policy, giving favorable views. Mester, Williams, and Clarida have all said that it’s worth considering, but not just yet.

Many analysts think that the Fed might implement this policy by September. So, the interest on the subject is to see if there is any formal commentary that might confirm (or dismiss) expectations around the policy.

The Latest Record Highs

The other issue that we expect will affect Powell’s presser is the latest data, which has outperformed expectations, especially in the jobs arena.

The Nasdaq has returned to record highs, thanks mostly to tech stocks. Global markets are also close to new record highs despite the pandemic.

The thinking is that the Fed will take a more neutral stance about easing, as optimism about the recovery seems to be the rule of the day.

How much longer the Fed will be putting record amounts of liquidity into the markets is really the lynchpin to market growth. Everyone knows that unlimited stimulus is not going to be forever.

Therefore, traders are going to be listening really carefully for anything that Powell might say about when the stimulus will be paired back.

The Takeaways

There seems to be somewhat of a consensus around the idea that the FOMC will keep the current policy the same, but that they will moderate the language in the statement.

Something along the lines of “current policy is sufficient, but stand ready to intervene as necessary”.

The market exuberance might be getting a bit ahead of itself. Lockdowns are still easing and we don’t have concrete data for a recovery yet. Therefore, the Fed is likely to have a more cautious approach.

Even with a very dovish outlook from the Fed, we could still get a tweet from President Trump in the aftermath demanding more action.