Market focus ahead of Wednesday’s FOMC meeting is the timing of taper.
No details are expected yet with the focus instead on the incomplete recovery, particularly in the labour market.
Watch for Powell to repeat his recent comment that the economy is at an ‘inflection point’.
This FOMC meeting will likely be fairly quiet. The Fed will probably anchor to their sentiment of the March SEP meeting. One of the key messages from the March meeting was that the growth outlook is extremely robust. But for now, that means very little for policy because the Fed’s reaction function is outcome not forecast based. This is a message the Fed has driven home explicitly so far this year. The market narrative entering the April meeting will be all about the timing of taper. And while the Fed language has indicated progress on ‘substantial further progress’, the focus of the April meeting and press conference will remain on the incomplete recovery given the 8-9mn jobs still missing.
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Summary
- Market focus ahead of Wednesday’s FOMC meeting is the timing of taper.
- No details are expected yet with the focus instead on the incomplete recovery, particularly in the labour market.
- Watch for Powell to repeat his recent comment that the economy is at an ‘inflection point’.
This FOMC meeting will likely be fairly quiet. The Fed will probably anchor to their sentiment of the March SEP meeting. One of the key messages from the March meeting was that the growth outlook is extremely robust. But for now, that means very little for policy because the Fed’s reaction function is outcome not forecast based. This is a message the Fed has driven home explicitly so far this year. The market narrative entering the April meeting will be all about the timing of taper. And while the Fed language has indicated progress on ‘substantial further progress’, the focus of the April meeting and press conference will remain on the incomplete recovery given the 8-9mn jobs still missing.
Fed Communication Since the March Meeting
We believe there have been four key pieces of Fed communication since the March meeting.
- In both his 60 Minutes appearance and at the Economic Club of Washington, Fed Chair Jerome Powell said the economy was at an ‘inflection point.’ The debate entering the April meeting is all about taper timing. Does ‘inflection point’ equal progress to ‘substantial further progress’? That seems reasonable.
- Powell noted that the recent employment numbers were ‘great’ but that he wanted to see ‘a string of reports like that.’ This is another hint that were job gains to continue at the current pace, that would likely constitute ‘substantial further progress.’
- New Fed Governor Christopher Waller was very optimistic on the outlook, saying that the US economy is ‘ready to rip.’ However, because of how deep the hole is (8-9mn jobs still missing), Waller stressed that the Fed is ‘not there yet’ and that there is ‘a long way to go.’ This point really emphasized the Fed’s current reaction function. Despite the rosy outlook, the Fed will be hyper focused on all the ground they believe the economy still has to make up.
- In a CNBC interview, Governor Lael Brainard made it clear that the recovery was incomplete with 8-9mn jobs still missing. She also clarified the Fed’s current reaction function: it is premised on outcomes and not the outlook. In terms of removing accommodation, Brainard called for ‘resolute patience.’
The Bottom Line
Like the March minutes communicated, recent data will encourage the Fed. But they will also note that they are far from their dual objective. In terms of taper, the Fed will likely continue to say that it will take ‘some time’ until ‘substantial further progress’ is made.
That said, we expect the Fed to incorporate Powell’s ‘inflection point’ comment, likely through the press conference. In our view, this will act as the Fed saying they are making progress on ‘substantial further progress’ without really saying it. Regarding sequencing, this sets the Fed up to say ‘inflection point’ in April, more deliberately hint at ‘progress’ over the summer, and announce that ‘substantial further progress’ will be met in September. This would set the stage for a tapering of asset purchases to begin in 2022.
Jon Turek is author of the Cheap Convexity blog and CEO of JST Advisors.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)