calm ahead of August, rate hike closer By

calm ahead of August, rate hike closer By
calm ahead of August, rate hike closer By

© Reuters.

By Alessandro Albano – Two-Day FOMC Meeting, Ending with Monetary Policy Decision Tomorrow Night (20:00 CEST), May Disappoint Expectations for Bank Preventive Action to Limit Continued Price Rise for consumption as observed between April and May. However, the meeting could provide important insights into what to expect in late August, when central bankers meet at their regular Jackson Hole annual meeting.

What to expect from the meeting

According to analysts from ING (AS :), at today’s meeting the executive arm of the Federal Reserve will leave the policy unchanged “by dampening any talk on tapering to the maximum”. “Markets will look for more indications on inflation and try to understand if the Fed has begun to recognize that inflation may not be as transient as previously thought,” analysts say in a research note.

“A technical adjustment is certainly possible to address the rapid build-up of excess liquidity, but downside risks to the dollar remain,” the Dutch bank said.

According to the general consensus, the Fed will not change the Fed funds range (0-0.25%), nor will it make any adjustments to the $ 120 billion monthly QE. However, we will receive updated forecasts, including the Fed’s dot plot of markets looking to see if there are any signs of cracks in the Fed’s transitional inflation position.

“Transitional” inflation?

With price inflation at its 13-year high and core inflation at its 30-year high, executive committee members “will be a little more balanced in their assessment of inflation risks,” according to ING experts. After all, the Fed’s Beige Book showed that corporate pricing power “is returning and there is evidence that labor costs are starting to rise.”

“Inflation expectations are also clearly rising, as evidenced by the University of Michigan Consumer Confidence report.”

For economists, it is likely that “we will see a modest upward revision of their inflation forecasts”, with GDP “could also see an upward push in the near-term forecasts”.

Job market

For analysts, the Fed will place more emphasis on below-expected April and May employment data, signaling that the economy “still needs stimulus.” “With employment levels still down by more than seven million from February 2020, they can use that to justify their reasoning that it is too early to discuss QE tapering,” adds ING.

For the Dutch bank, with the economy in the summer quarter “recovering all the production lost during the pandemic”, it is likely that “it will take another couple of months of strong economic activity, high inflation and rising employment before the Fed agrees that the economy has made substantial progress ”.

Small steps towards tapering?

Despite Powell’s dovish statements on several occasions, some policy-makers have hinted that they would prefer to move in this direction, such as Philadelphia Fed President Patrick Harker, who said weeks ago that “it may be time to at least think about tapering “.

“We believe the Federal Reserve’s Jackson Hole conference in late August will kick off the tapering issue,” ING said, “and this will be spelled out more formally at the September FOMC meeting with a formal announcement of QE cuts at the meeting. of December “.

Rate hike closer

In terms of interest rates, the Fed’s March dot plot showed that four of the 18 members of the executive arm expect interest rates to rise in 2022, while seven believe they are aiming for interest rates to rise by the end of the year. 2023. According to the March indications, the majority of members do not believe that an increase in federal funds “not before 2024” is possible.

“We may see one or two officials push forward their predictions on Wednesday, but we don’t expect those medians to change – it would take three people to bring the median pressure of the first increase in 2023.”

But, ING point out, “we continue to think that the first rate hike will take place in early 2023 with the risks oriented towards early action, as the pandemic scars on the supply side mean it will struggle to keep up. the pace with the strength of demand “.

“In an environment where companies have pricing power – experts explain – workers are starting to push for higher wages and housing costs will be more pronounced and persistent, and we’re not even remotely sure when the Fed talks about transient inflation “.

ING expects consumer inflation to remain above 4% at least until the first quarter of 2022, with the underlying dynamic “above 3% at least until the second quarter of next year”.

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