The Federal Reserve has a strange balancing act this week: It is likely to issue clearer economic forecasts as they try to reassure investors that it is not yet “a ‘think about it’ builds on flat rates – and it doesn’t have to.
More optimistic estimates for gross domestic product, unemployment and inflation would usually suggest that monetary policy would, therefore, begin to tighten. For a Fed that relies on data, the message that the economy is growing much faster than expected contradicts the message that rates will remain close to zero by 2023. As the Federal Open Market Committee, the Fed’s policy arm , trying to square the controversial ones will focus on the dynamics of how investors enter new economic forecasts, the dot plot showing updated rates forecast, and a conference Chairman Jerome Powell’s announcement.
“It’s a good line for them to walk,” says Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, as market prices are tighter links amid developing economic data, Covid-19 vaccines, and raises inflation concerns, while the Fed repeats. a dovish position. “How do you tolerate a telegraph while saying you won’t be behind the curve? ”
The rate decision and updated materials will be announced this Wednesday at 2pm Eastern time, followed by a Powell question and answer session. Here’s a rundown of what Wall Street looks like.
Updated economic forecasts: In the December Economic Forecasts Summary, the FOMC expected GDP growth of 4.2% for 2021 and 3.2% for 2022, bringing its inflation expectation to 2% by the end of 2023 and thus implying that rates start rising in 2024.
Aneta Markowska, chief economist at Jefferies, estimates that the FOMC will raise GDP projections for the next two years to around 6% and 4%, respectively. This should push the unemployment rate lower than the natural level (the lowest unemployment rate an economy can sustain with inflation still stable) by the second half of 2022, she says, means that the 2% inflation forecast would be carried forward to the end of 2022— so the first rate increase was carried forward to 2023. (In December, the Fed expected inflation at 1.8% at the end of this year.)
Fed officials have been showing comfort in allowing inflation to run hotter than the 2% target. The question is with how many. Even though the FOMC is likely to reiterate that the recovery will slow after this year, new inflation projections above 2% may appear in both 2022 and 2023 with an unemployment rate of 3.5% by the end of 2023, thus meeting the Fed’s inflation criteria. above 2% and “highest earnings,” says David Kelly, chief global strategist at JP Morgan Funds.
Some economists, however, say the Fed could focus more on a broader unemployment rate, known as the U-6 rate, which includes unskilled workers. confident as well as those who work part-time but would prefer to work full-time, among others. This would give policy makers more room as U-6 levels are higher (11.1%) compared to the “official” U-3 rate (6.2%).
As the Fed’s new policy framework defines maximum earnings as the inclusion of ‘broad and inclusive’ earnings, investors wishing to block the next rate move should Fed to monitor U-6 unemployment rate, says Bostjancic of Oxford Economics.
The dot plot: In December, only one in 17 FOMC members who submitted a forecast saw a rate hike by the end of 2022 and five saw a rate hike by the end of 2023. Although some economists say Fed officials could keeping an eye on their rising dots, or appearing more hawkish and thus fueling an increase in long-term flat rates that have been going on, some others say the Fed needs to show some change in its rate view.
“Given the scale of the proposed changes, it would be difficult to justify any change in the policy outlook,” Markowska said. “To do this would be inconsistent with data dependency and would strongly suggest that the Fed is reliant on a calendar (which the Fed says is not).” At the same time, she says, the Fed has not been pushing back against the expected rebound of standards, which is a clear testament to what already exists.
Bostjancic expects the median forecast to show at least one 0.25% rate increase in 2023, while Markowska estimates that the mid-2023 dot could rise to 0.375% (she notes only 4 members need to raise their dots – or point to a higher Fed fund level expected at the end of 2023 – to move the mid-level forecast The bond market has pushed prices in three rises quarter-point by end-2023.
Bond market activity: How the Treasury market handles the Fed’s new information will be at least as interesting as the information itself. Instead of the Fed potentially catching up to where the market is already in terms of rate expectations, Bostjancic says even a whiff of the Fed could pull ahead of an expected rate hike. bring the bond market to price in a nutshell.
Ian Lyngen, head of rate strategy at BMO Capital, says chances are low Powell will significantly change his stance on the recent yield action, he insists, while the move on driven by an improving economic outlook and the expectations of inflation, that the reprint is for the right reasons. “Needless to say, higher yields are good so they don’t and it’s just an inclusion point that represents the most important policy threat to the Fed,” he says.
Lyngen is monitoring the 1.64% rate over the 10-year period (last week’s yield peak was in addition to the highest for the benchmark since early February 2020) and has a target of 1.75% his on the note.
SLR exemption extension: It may add to Wednesday’s bond market action as any indication surrounding the Fed’s plan for a popular program launched in April last year, while a pandemic closure was spreading.
Wall Street hopes to extend temporary release of Finance and bank deposits at the Fed Reserve Banks from the Supplementary Level Ratio of banks, which requires financial institutions to measure a minimum ratio of 3% in capital according to the total waulking rate. . The release is expected to end at the end of March.
The adventure of liberation has a profound effect. Over the past year, banks have increased their purchases of Finance by a whopping $ 854 billion, and bank stocks have accumulated by $ 1.8 trillion, Bostjancic notes. Economists say a lack of expansion could significantly reduce banks ’desire for Finance, putting even higher pressure on yields.
Easier guards: Wall Street generally does not expect further rebates unless yields continue to rise more erratically and financial conditions tighten meaningfully. For now, the FOMC is “well placed to stay on the course at the moment,” Lyngen says, “even if such an outcome would run the risk of supporting investment investment Other finance at a stage when investors are keeping an eye on it, if they are not concerned. ”
In terms of possible responses to any chaotic jump in output, economists say the Fed has few options. Immediately, the Fed could choose to extend the duration of the conventional asset purchases, Bostjancic said. As of December, average maturity under the current program was 7.4 years, she says, saying policymakers could start buying 10- to 30-year-old Centers. This would effectively be one part of a new “turnaround”, with the other leg involving the sale of short finance bills, Bostjancic says.
If a financial situation tightens much more sharply and buying further out of the yield curve is not enough, Bostjancic and others say the Fed could try to achieve loop control.
YCC, which was taken over by the Fed after World War II, the Bank of Japan in 2016, and the Reserve Bank of Australia in 2020, aims to control interest rates on some yield curve, aim for long-term levels directly by applying a flat rate. hats on special alphabets. As economists at the St. Louis Fed put it, because bond prices and yields are related, this also means a price floor for targeted maturities: if bond prices (yield) of targeted maturities are still above ( below) the floor, the central bank doing nothing. But if prices fall (rise) below (above) the floor, the central bank buys targeted mature bonds – increasing demand and hence the price of these bonds.
Write to Lisa Beilfuss at [email protected]