The Fed will hold rates steady and keep its $120 billion monthly bond purchases unchanged at the March 2021 FOMC meeting, with tapering unlikely until summer. Chair Powell's press conference will address 10-year yields at pre-pandemic highs and inflation concerns. The June meeting will matter more, when the Fed may start signaling tapering and future rate hikes.
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Hello and welcome to a quick preview for the upcoming FOMC meeting on Wednesday. Overall, from a policy perspective, not actually expecting much in the way of definitive change, certainly not for interest rates and the QE program, which we're anticipating to be firmly on hold. In terms of the QE program of $120 billion worth of bond buying on a monthly basis, split between $80 billion in Treasuries and $40 billion in MBS should remain unaltered. In terms of any talk of tapering at this point, that's probably not going to be for another couple of months until the summer, uh, is our forecast. Otherwise, in terms of this meeting, what is it that we should look at? Well, we do have the latest of the summary of economic projections, so we get the outlook for things like unemployment, GDP, inflation, and importantly, the dot plot matrix for for their interest rate expectations. Now, on that point, in terms of the current Fed stance last issued in December, this being the next subsequent update for the March meeting, we are anticipating perhaps some nuance, subtlety to shifting of a few FOMC members toward looking for rate hike in 2023 rather than beyond that year. Just given the fact we've had a pickup in the vaccination deployment, we've also had the new stimulus come in. So we are expecting the economy to reopen, and hence a lot of the moves we've had in markets the last few weeks with the yield rise that we've had. Now, is that going to be tantamount to a change in the medium dot plot? Probably not. And therein lies the main point. We're not actually at the point yet where I think we're going to see a tangible shift to bringing rate rises officially on their projections to align with what market expectations are, which is a rate hike earlier than what the Fed are telling us. In terms of other things, we are probably going to see an upgrade on growth and inflation. None of those should really come as too much of a surprise given those aforementioned reasons. So what else to look for? Well, there is of course a press conference with Jerome Powell, and he's going to be very much questioned on the recent movement in markets that we've had, led by yields now trading at the highest they've been since pre-pandemic levels, and the 5-year breakeven inflation rate now the highest since 2008. So people are definitely looking for higher yield future. But as we've heard from Powell and his colleagues over recent weeks and reiterated in the Wall Street Journal article on March 4th, where he said explicitly that in regard to that issue, that it would take a substantial time to achieve the Fed's goal of full employment and 2% sustained inflation. So pretty much expecting that to be reiterated at the meeting. How impactful is that to markets? Well, I think the sensitivity to not pushing back against some of the recent yield move probably has abated a little bit. But if you look where 10-year yields are at the moment and the UST note, it's at a fairly precarious marker, which could constitute on a break another extension of the yield move and consequently could support the dollar and weigh on those major pairs as well as some of the precious metals like we've seen of late. So that's pretty much it. Overall, though, from a top-level perspective, This meeting in itself might have implications for the short-term trading environment. Ultimately, our view is that the June meeting from the Fed will be of much more significance for them, potential more, uh, communication tweaks given that where the economy is likely to be at that point in time, having probably fully reopened given Biden's plan to have everyone in the US inoculated now 2 months earlier than previously expected. As soon as May. So when it gets to that point in time, all things remaining equal, it's likelihood then the Fed are going to have to alter in some way their communication to lead towards the idea of potential tapering well before then, the process of lifting interest rates in the future. All right, hope that helps. Good luck and take care.
