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Livesquawk - Fed Set To Repeat Dovish Stance Despite Improved Outlook
Fed Set To Repeat Dovish Stance Despite Improved Outlook

- Interest rates, QE levels seen unchanged

- Repeat of forward guidance likely

- Rate decision due Wednesday at 18:00 GMT

 

By Eric Culp, European Editor

LiveSquawk News

@EricCulpLS

 

27 April 2021 | 15:00 GMT

 

Few changes if any are expected this week from the US Federal Reserve as America’s central bankers seem willing to further monitor the development of the world’s largest economy before considering alterations to monetary policy. Economists widely anticipate the Federal Open Market Committee to hold the benchmark interest rate in the current range of 0% - 0.25% and monthly asset purchases at USD 120bn.

 

In a message that largely echoed the comments of other institutions, Barclays said the results of this meeting and Chairman Jerome Powell’s comments after the announcement could feel like déjà vu. “We look for the Fed to stick to its message of patience before any moves to normalise its policy stance. We expect minimal changes in the statement, mainly to reflect solid incoming data on spending and employment, as well as the firming in inflation.”

 

The US Labor Department said non-farm payrolls in March surged by 916,000 – a seven-month high – which pushed the jobless rate down to 6%. Headline consumer price growth jumped to 2.6% last month.

 

But the news just isn't good enough, Barclays explained. “We expect Chair Powell to reiterate his view that much of the firming in inflation is coming from transitory sources, while labour markets still have a long way to go before reaching full employment. “We look for the meeting to be relatively uneventful and suspect FOMC members will want to see six months of solid employment growth and inflation data before moving toward the tapering of asset purchases.”

 

Too early for the “T” word

Market players trying to learn about the Fed’s plans to begin tapering its quantitative easing measures could be setting themselves up for disappointment Wednesday, TD Securities said. “We don’t expect the chairman to balk at using the "T" word in his post-meeting press conference […], but we certainly don't expect any signal that tapering is imminent. Nor do we expect any change to the forward guidance parts of the FOMC statement.”

 

Powell said as much last month, noting that the bank is not ready to even start talking about broaching the subject of cutting the level of purchases. “When we see that we’re on track […] then we’ll say so.

 

TD Securities said it also expects the Fed to leave the interest rate on excess reserves (IOER) and overnight reverse repo rates (RRP) untouched this week. “Increases are likely before too long due to downward pressure on money market yields from growth in bank reserves. Such changes, if they occur, should be viewed as technical adjustments.” Other analysts supported arguments against any changes, citing the current effective Federal Funds rate of 0.07%

 

The Fed last month raised its growth projections for the current year versus the December forecasts, with the GDP expansion rate lifted to 6.5% from 4.2%. The US is scheduled to report the advance first-quarter GDP growth rate on Thursday (12:30 GMT).

 

The Fed’s rosier outlook in March followed Washington’s approval of a USD 1.9tln pandemic aid package that provided many Americans with USD 1,400 stimulus payments last month, money preceded by USD 600 pay-outs in January.

 

The added cash in the economy is also expected to spur consumer price growth, the Fed said in its forecasts. Its estimate for 2021 PCE core inflation, the US central bank’s preferred measure, was raised to 2.4%, a significant increase from the 1.8% projection in December.

 

Last month, the Fed cut the expected jobless rate for this year to 4.5%, which was well below the previous projection of 5.0%, and the labour market will remain a key factor for setting monetary policy, Oxford Economics said. “Unemployment is still much higher for low-wage and minority workers, so the goal of achieving maximum and inclusive employment, an unwavering goal of the Fed, is still a ways off.

 

“With inflation expectations well-anchored and the health crisis still not over, the Fed is likely to keep its policy rate at current levels for at least two more years.”