Fed Expected To Position Taper Update For Late Summer
Federal Open Market Committee (FOMC) participants meet via video conference for a two-day meeting
- Fed set to keep policy unchanged
- Risks from Delta variant, government impasse persist
- Analysts await Jackson Hole update
- Rate decision due Wednesday at 18:00 GMT/ 13:00 CST
By Harry Daniels
LiveSquawk News
@HarryDaniels71
27 July 2021|12:45 GMT
The case for ratcheting up the “taper talk” has been a contentious one among members of the Federal Reserve’s Open Market Committee: with both domestic and global growth appearing robust and inflation running hot, it seemed there was a desire to hit a more hawkish tone in the July communique.
But with rising cases of the Covid-19 Delta variant and stalemate between the Republicans and Democrats over the infrastructure bill, analysts said they expect the central bank to stay on message. Economists widely anticipate the FOMC will hold the benchmark interest rate in the current range of 0% to 0.25% and monthly asset purchases at USD 120bln (or USD 80bln in treasuries and USD 40bln mortgage-backed securities).
Data in the lead up to July’s meeting have sent mixed signals. Both the Fed’s preferred inflation measure, core PCE (up 3.9% y/y in May), and CPI (up 5.4% y/y in June) have run hot. First quarter GDP expanded at an annual rate of 6.4%. Second quarter GDP is predicted to grow 8.5% - 9%, with many forecasting this as the peak of the recovery for the economy.
The Fed is expected to acknowledge the progress in activity to date, Morgan Stanley analysts say that since May, the US economy has been moving through another turning point, “one that our forecasts have been anticipating, but the consensus has been slower to reflect. Driven by fiscal stimulus and reopening, peak rates of growth for GDP are in for the year.
“Likewise, we forecast that the peak rate of growth in inflation is also behind us.”
Chair Jerome Powell’s semi-annual testimony to Congress last week offered some insight into the Fed’s current stance. “Inflation is being temporarily boosted by base effects, as the sharp pandemic-related price declines from last spring drop out of the 12-month calculation,” he explained. “In addition, strong demand in sectors where production bottlenecks or other supply constraints have limited production has led to especially rapid price increases for some goods and services, which should partially reverse as the effects of the bottlenecks unwind.”
It could go either way …
Having updated their post-meeting statement to reflect a more optimistic outlook following the June FOMC meeting, Deutsche Bank’s senior US economist Brett Ryan said he expects few changes from the Fed this month. “However, we see risks to both sides of this expectation. A more hawkish adjustment could downplay the role of transitory inflation factors or remove the requirement for ‘substantial’ from ‘further progress’ needed to start tapering.
“On the dovish side, the committee could acknowledge the emergence of downside risks from the delta variant. But having just adopted more constructive language around the pandemic’s impact on the economy in June, it is likely too early to emphasise these risks by elevating them to the statement.”
There will not be any apprise of the ‘Dot plot’ from Fed officials at this meeting, so analysts point to strategic considerations as the important message to take from Wednesday’s policy announcement. This potentially leaves the Jackson Hole Symposium at the end of August as the next prime opportunity for the central bank to guide the markets on monetary policy.
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- Fed set to keep policy unchanged
- Risks from Delta variant, government impasse persist
- Analysts await Jackson Hole update
- Rate decision due Wednesday at 18:00 GMT/ 13:00 CST
By Harry Daniels
LiveSquawk News
@HarryDaniels71
27 July 2021|12:45 GMT
The case for ratcheting up the “taper talk” has been a contentious one among members of the Federal Reserve’s Open Market Committee: with both domestic and global growth appearing robust and inflation running hot, it seemed there was a desire to hit a more hawkish tone in the July communique.
But with rising cases of the Covid-19 Delta variant and stalemate between the Republicans and Democrats over the infrastructure bill, analysts said they expect the central bank to stay on message. Economists widely anticipate the FOMC will hold the benchmark interest rate in the current range of 0% to 0.25% and monthly asset purchases at USD 120bln (or USD 80bln in treasuries and USD 40bln mortgage-backed securities).
Data in the lead up to July’s meeting have sent mixed signals. Both the Fed’s preferred inflation measure, core PCE (up 3.9% y/y in May), and CPI (up 5.4% y/y in June) have run hot. First quarter GDP expanded at an annual rate of 6.4%. Second quarter GDP is predicted to grow 8.5% - 9%, with many forecasting this as the peak of the recovery for the economy.
The Fed is expected to acknowledge the progress in activity to date, Morgan Stanley analysts say that since May, the US economy has been moving through another turning point, “one that our forecasts have been anticipating, but the consensus has been slower to reflect. Driven by fiscal stimulus and reopening, peak rates of growth for GDP are in for the year.
“Likewise, we forecast that the peak rate of growth in inflation is also behind us.”
Chair Jerome Powell’s semi-annual testimony to Congress last week offered some insight into the Fed’s current stance. “Inflation is being temporarily boosted by base effects, as the sharp pandemic-related price declines from last spring drop out of the 12-month calculation,” he explained. “In addition, strong demand in sectors where production bottlenecks or other supply constraints have limited production has led to especially rapid price increases for some goods and services, which should partially reverse as the effects of the bottlenecks unwind.”
Having updated their post-meeting statement to reflect a more optimistic outlook following the June FOMC meeting, Deutsche Bank’s senior US economist Brett Ryan said he expects few changes from the Fed this month. “However, we see risks to both sides of this expectation. A more hawkish adjustment could downplay the role of transitory inflation factors or remove the requirement for ‘substantial’ from ‘further progress’ needed to start tapering.
“On the dovish side, the committee could acknowledge the emergence of downside risks from the delta variant. But having just adopted more constructive language around the pandemic’s impact on the economy in June, it is likely too early to emphasise these risks by elevating them to the statement.”
There will not be any apprise of the ‘Dot plot’ from Fed officials at this meeting, so analysts point to strategic considerations as the important message to take from Wednesday’s policy announcement. This potentially leaves the Jackson Hole Symposium at the end of August as the next prime opportunity for the central bank to guide the markets on monetary policy.