Bolstered by the impact of fiscal and Covid-19 stimulus packages, the US Federal Reserve is expected to forecast an improving economic outlook with the labour market and inflation to rebound faster than anticipated in December.
However, traders will likely be disappointed if they are expecting sunnier projections to translate to changes in monetary policy when the US central bank's Federal Open Market Committee (FOMC) ends its two-day meeting on Wednesday.
Reaffirming its extremely dovish stance, the FOMC will hold its funds target range steady at 0%-0.25%, analysts forecast, while the QE monthly purchasing target should remain at “at least” USD 80bln in treasuries and USD 40bn in agency mortgage-backed securities.
Fed Chairman Jerome Powell is set to stress a change in plans for interest rates and bond purchases is premature while he wrestles with questions on tapering given the choppiness in bond yields.
While analysts expect the central bank keep rates at current levels through 2023, the recent wave of volatility in money markets has stoked speculation of a break from its holding pattern. The Fed may be forced into a technical adjustment, but virtually no one expects action at this week’s meeting.
New Summary Of Economic Projections
Amidst consistent indications of an improved outlook, the US central bank is scheduled to update its economic and rate projections for the first time this year on Wednesday. The revised economic forecasts are expected to reflect the improved outlook underpinned by an additional USD 1.9 tln in fiscal stimulus, an improved pandemic outlook, and the stronger-than-anticipated start to activity this year.
As the US vaccination programme continues to run ahead of schedule, the Fed is poised to announce a significant upward revision to its median projection for US gross domestic product, which in December it set at a 4.2% expansion in 2021.
“For 2021 GDP growth, we expect a sizeable increase in the median projection to around 6%,” analysts at HSBC said. “We expect many of the policymakers will also raise their projections for 2022 GDP growth due to the size and scope of pending fiscal policy stimulus.”
However, attentions will be turned to the unemployment and inflation forecasts, as the Fed has signalled that its dual mandates of maximum employment and sustained 2% inflation are prerequisites for rate lift-off — a scenario officials have described as a long way off.
Analysts predict fresh forecasts will pencil in a fall in unemployment this year to well below the 5% projected three months ago, as officials have said they believe the current 6.2% vastly understates the weakness of the labour market.
Supported by base effects and the reopening of the economy, analysts point to a continued rise in inflation in the Spring. However, Kathy Bostjancic, chief US financial economist at Oxford Economics highlights its temporary increase. “The most likely outcome is that after a spring peak, inflation will moderate while remaining above 2% for longer than at any other time over the past decade,” she said, noting that the revised inflation forecasts should reflect these dynamics.
Meeting Lift-Off Criteria
Officials are also set to update their projections for the path of short-term interest rates, a guide to how Fed policy might evolve in the next couple of years. The dot plot, which reaps a great deal of market attention, in December showed that 12 of 17 Fed officials had expected the benchmark federal-funds rate to remain pinned near zero through 2023. Traders in interest rate futures are currently pricing in a much more aggressive scenario, with lift-off occurring in late 2022 and two additional quarter-percentage-point hikes in 2023.
Philp Marey, senior US strategist at Rabobank, emphasised the danger of mixed messages from the Fed, as upgraded economic projections could be spark renewed speculation about rate hikes. “Markets could extrapolate an upward shift in the dot plot into further upward shifts, therefore anticipating rate hikes earlier than the Fed has in mind at this moment. If Powell fails, we could see another move upward in yields.
“The problem for Powell is that a single off-consensus forecast could undermine the message that the majority in the FOMC is trying to send to the markets.”
Most analysts said they expect the majority of forecasts to continue to signal no rate hikes through the end of 2023. “Despite the more ebullient macro forecasts, the Fed will remain very patient with regards to initiating rate lift-off as policymakers wait for the labour market to reach maximum employment and look past the transient acceleration in inflation” Bostjancic noted. “We look for the FOMC to signal that the conditions for rate lift-off will be satisfied by 2023 and for the median forecast to show at least one 25 basis point rate hike during 2023.”
Analysts at HSBC offered a continued dovish stance: “Given the growth outlook, it will be important to see whether more policymakers begin to project that rate hikes will be appropriate during the next three years. On balance we expect that the median projection will continue to indicate an unchanged federal funds rate through 2023.”
FOMC December Dot Plot Projections
‘Moderate Overshoot’ Of Inflation
After 10 years of inflation largely running below the Fed’s 2% target, officials last year scrapped their longstanding practice of lifting interest rates to pre-empt rising prices. pledging under a new framework to no longer act early. Officials now want to see inflation expectations rise somewhat above 2% before they will raise rates. However, market participants have been left in the dark on exactly how high the Fed would be comfortable seeing inflation rise, or for how long.
Some analysts say that uncertainty has fuelled speculation that the central bank will move sooner than officials have implied. That, in turn, contributed to a big jump in market interest rates that could lessen the effectiveness of the Fed’s stimulative policies.
Faced with a torrent of inflation questions at the accompanying press conference, Powell is set to reiterate his scepticism about the trend in inflation suddenly changing significantly. "Inflation dynamics do change over time, but they don't change on a dime" Powell said in his biannual Monetary Policy Report testimony a couple of weeks ago.
Analysts at Deutsche Bank said they see Powell emphasising that significant uncertainties remain, and the recovery still has a long way to go, particularly in the labour market. “Powell is also likely to reiterate that any discussion of tapering is ‘premature’ and that it will likely be ‘some time’ before the Committee can even assess if their goals have been achieved.
“On the topic of rising yields – US 10-year yields are up around 60 basis points since the last FOMC meeting in late January – he will likely once again emphasise that the Fed has the tools to deal with issues as they arise, and that they would respond to disruptive or persistent tightening of financial conditions as necessary.”
Oxford Economics’ Bostjancic said with total recovery still elusive, the Fed will want to maintain accommodative conditions for as long as possible through verbal guidance. “Chairman Powell is likely to reiterate that employment and inflation remain far from levels that would trigger a rate lift-off. Beyond verbal guidance, the FOMC could implement yield curve control. However, the Fed would intervene in the markets only if necessary.”
Technical Adjustments
The recent volatility in money markets has stoked speculation the Fed may be forced into a technical adjustment with the levers controlling its benchmark interest rate to ensure that it does not fall too low. Interest rates in some short-term funding markets have dropped into negative territory on a handful of occasions recently. Most economists, however, expect policymakers to hold off for now in taking corrective action that would mean lifting the rate excess reserves (IOER).
“The debate on a technical increase in the IOER rate has dampened a bit over the past weeks as the effective fed funds rate remains around seven basis points, which is not too far from the target mid-point of 12.5 basis points,” notes Nordea’s Andreas Steno Larsen.
Additionally, the Fed needs to decide by months’ end whether to extend the temporary exclusion of Treasuries and bank deposits at the Fed Reserve Banks from the banks’ Supplementary Leverage Ratio (SLR). The temporary extension was adopted in April last year as part of the Fed’s emergency actions amid the pandemic.
For money markets, the expiration of SLR exemptions could unleash liquidity directly into the funds as banks will likely shed deposits. This may intensify the demand for short-term instruments, putting further downward pressure on rates and money-market yields, analysts project.
JPMorgan strategists said they continue to believe that SLR will be extended for both reserves and Treasuries, taking place at the holding company level “at minimum.”
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- Policymakers to reiterate loose policy, hold rates steady
- Upbeat growth and inflation forecasts expected
- Median rate lift-off projection advanced to 2023
- Talks only on technical move; action to be delayed
- Rate decision due Wednesday at 18:00 GMT
- Press conference set to follow at 18:30 GMT
By Peter Devlin
LiveSquawk News
@dev_peter
16 March 2021 | 19:00 GMT
Bolstered by the impact of fiscal and Covid-19 stimulus packages, the US Federal Reserve is expected to forecast an improving economic outlook with the labour market and inflation to rebound faster than anticipated in December.
However, traders will likely be disappointed if they are expecting sunnier projections to translate to changes in monetary policy when the US central bank's Federal Open Market Committee (FOMC) ends its two-day meeting on Wednesday.
Reaffirming its extremely dovish stance, the FOMC will hold its funds target range steady at 0%-0.25%, analysts forecast, while the QE monthly purchasing target should remain at “at least” USD 80bln in treasuries and USD 40bn in agency mortgage-backed securities.
Fed Chairman Jerome Powell is set to stress a change in plans for interest rates and bond purchases is premature while he wrestles with questions on tapering given the choppiness in bond yields.
While analysts expect the central bank keep rates at current levels through 2023, the recent wave of volatility in money markets has stoked speculation of a break from its holding pattern. The Fed may be forced into a technical adjustment, but virtually no one expects action at this week’s meeting.
New Summary Of Economic Projections
Amidst consistent indications of an improved outlook, the US central bank is scheduled to update its economic and rate projections for the first time this year on Wednesday. The revised economic forecasts are expected to reflect the improved outlook underpinned by an additional USD 1.9 tln in fiscal stimulus, an improved pandemic outlook, and the stronger-than-anticipated start to activity this year.
As the US vaccination programme continues to run ahead of schedule, the Fed is poised to announce a significant upward revision to its median projection for US gross domestic product, which in December it set at a 4.2% expansion in 2021.
“For 2021 GDP growth, we expect a sizeable increase in the median projection to around 6%,” analysts at HSBC said. “We expect many of the policymakers will also raise their projections for 2022 GDP growth due to the size and scope of pending fiscal policy stimulus.”
However, attentions will be turned to the unemployment and inflation forecasts, as the Fed has signalled that its dual mandates of maximum employment and sustained 2% inflation are prerequisites for rate lift-off — a scenario officials have described as a long way off.
Analysts predict fresh forecasts will pencil in a fall in unemployment this year to well below the 5% projected three months ago, as officials have said they believe the current 6.2% vastly understates the weakness of the labour market.
Supported by base effects and the reopening of the economy, analysts point to a continued rise in inflation in the Spring. However, Kathy Bostjancic, chief US financial economist at Oxford Economics highlights its temporary increase. “The most likely outcome is that after a spring peak, inflation will moderate while remaining above 2% for longer than at any other time over the past decade,” she said, noting that the revised inflation forecasts should reflect these dynamics.
Meeting Lift-Off Criteria
Officials are also set to update their projections for the path of short-term interest rates, a guide to how Fed policy might evolve in the next couple of years. The dot plot, which reaps a great deal of market attention, in December showed that 12 of 17 Fed officials had expected the benchmark federal-funds rate to remain pinned near zero through 2023. Traders in interest rate futures are currently pricing in a much more aggressive scenario, with lift-off occurring in late 2022 and two additional quarter-percentage-point hikes in 2023.
Philp Marey, senior US strategist at Rabobank, emphasised the danger of mixed messages from the Fed, as upgraded economic projections could be spark renewed speculation about rate hikes. “Markets could extrapolate an upward shift in the dot plot into further upward shifts, therefore anticipating rate hikes earlier than the Fed has in mind at this moment. If Powell fails, we could see another move upward in yields.
“The problem for Powell is that a single off-consensus forecast could undermine the message that the majority in the FOMC is trying to send to the markets.”
Most analysts said they expect the majority of forecasts to continue to signal no rate hikes through the end of 2023. “Despite the more ebullient macro forecasts, the Fed will remain very patient with regards to initiating rate lift-off as policymakers wait for the labour market to reach maximum employment and look past the transient acceleration in inflation” Bostjancic noted. “We look for the FOMC to signal that the conditions for rate lift-off will be satisfied by 2023 and for the median forecast to show at least one 25 basis point rate hike during 2023.”
Analysts at HSBC offered a continued dovish stance: “Given the growth outlook, it will be important to see whether more policymakers begin to project that rate hikes will be appropriate during the next three years. On balance we expect that the median projection will continue to indicate an unchanged federal funds rate through 2023.”
‘Moderate Overshoot’ Of Inflation
After 10 years of inflation largely running below the Fed’s 2% target, officials last year scrapped their longstanding practice of lifting interest rates to pre-empt rising prices. pledging under a new framework to no longer act early. Officials now want to see inflation expectations rise somewhat above 2% before they will raise rates. However, market participants have been left in the dark on exactly how high the Fed would be comfortable seeing inflation rise, or for how long.
Some analysts say that uncertainty has fuelled speculation that the central bank will move sooner than officials have implied. That, in turn, contributed to a big jump in market interest rates that could lessen the effectiveness of the Fed’s stimulative policies.
Faced with a torrent of inflation questions at the accompanying press conference, Powell is set to reiterate his scepticism about the trend in inflation suddenly changing significantly. "Inflation dynamics do change over time, but they don't change on a dime" Powell said in his biannual Monetary Policy Report testimony a couple of weeks ago.
Analysts at Deutsche Bank said they see Powell emphasising that significant uncertainties remain, and the recovery still has a long way to go, particularly in the labour market. “Powell is also likely to reiterate that any discussion of tapering is ‘premature’ and that it will likely be ‘some time’ before the Committee can even assess if their goals have been achieved.
“On the topic of rising yields – US 10-year yields are up around 60 basis points since the last FOMC meeting in late January – he will likely once again emphasise that the Fed has the tools to deal with issues as they arise, and that they would respond to disruptive or persistent tightening of financial conditions as necessary.”
Oxford Economics’ Bostjancic said with total recovery still elusive, the Fed will want to maintain accommodative conditions for as long as possible through verbal guidance. “Chairman Powell is likely to reiterate that employment and inflation remain far from levels that would trigger a rate lift-off. Beyond verbal guidance, the FOMC could implement yield curve control. However, the Fed would intervene in the markets only if necessary.”
Technical Adjustments
The recent volatility in money markets has stoked speculation the Fed may be forced into a technical adjustment with the levers controlling its benchmark interest rate to ensure that it does not fall too low. Interest rates in some short-term funding markets have dropped into negative territory on a handful of occasions recently. Most economists, however, expect policymakers to hold off for now in taking corrective action that would mean lifting the rate excess reserves (IOER).
“The debate on a technical increase in the IOER rate has dampened a bit over the past weeks as the effective fed funds rate remains around seven basis points, which is not too far from the target mid-point of 12.5 basis points,” notes Nordea’s Andreas Steno Larsen.
Additionally, the Fed needs to decide by months’ end whether to extend the temporary exclusion of Treasuries and bank deposits at the Fed Reserve Banks from the banks’ Supplementary Leverage Ratio (SLR). The temporary extension was adopted in April last year as part of the Fed’s emergency actions amid the pandemic.
For money markets, the expiration of SLR exemptions could unleash liquidity directly into the funds as banks will likely shed deposits. This may intensify the demand for short-term instruments, putting further downward pressure on rates and money-market yields, analysts project.
JPMorgan strategists said they continue to believe that SLR will be extended for both reserves and Treasuries, taking place at the holding company level “at minimum.”