Will the FOMC meeting trigger any key changes in interest rates?
IInvestors and traders are eagerly awaiting the Federal Reserve meeting, where interest rate policy is set. Markets were unusually calm, trading lower ahead of the meeting, although the central bank is unlikely to take any significant policy action.
Stock index futures and ETFs were largely unchanged on Wednesday morning’s trading, with funds like the Vanguard Total Stock Market ETF (VTI) and IShares Core S&P 500 ETF (IVV) dipping slightly, as investors await the Fed’s statement at 2 p.m. and President Jerome Powell’s subsequent press conference.
The Federal Reserve has been championing low rates and bond buying in support of a full economic recovery for more than a year now, but some economists suspect the Fed is citing the potential for a gradual reduction in its bond purchase program, as well as the possibility of a first rate increase in 2023.
“I think the commentary and the press conference will be interesting. There is clearly a division within the board of directors and among Fed chairmen as to how strong the economy is and whether it is time to start changing policy, ”said Rick Rieder, chief executive officer. global fixed income investments at BlackRock. “The way the president describes this is going to be very interesting. It’s hard to say it’s [going to be] hawkish because… I think it’s going from uber dovish to too dovish.
With inflation rising and signs of an economic recovery emerging, some Fed officials said the time may be right to start discussing a plan to adjust the purchase rate for the economy. ‘obligations, based on the minutes of the meeting.
With the pandemic still not fully under control, economists do not see Fed officials making any immediate changes, however.
“The message this week will likely be a heavy dose of ‘still a long way to go’ studded with concerns about the upside risks to inflation. We don’t expect the tapering debate to be robust, but just starting the discussion and expressing concerns about the strong inflationary momentum should have hawkish overtones, ”Barclays economists said in a brief. note.
“We are not expecting any major policy changes from the Fed. It will mainly be characterizations around tapering and what the Fed is saying about it, as well as adjustments to the Fed’s forecasts, ”said Mark Cabana, head of short-rate strategy in the United States at Bank America. . “On the cone, we think they’ll start talking about it. We expect Powell to reiterate that he’s still a long way off.”
The reduction in the bond program is a critical step because it represents the beginning of the end of the Fed’s so-called “quantitative easing” and suggests that the Fed would be ready to possibly raise interest rates. This process could take months, however.
The Fed’s lax monetary policies have been recognized as having helped catalyze the stock market’s recovery to constant and cool highs and create a robust environment for the housing market, keeping rates low for borrowers.
Some financial experts such as Goldman Sachs suggest that it is too early for the Fed to “talk about talking about phasing out”, even though some Fed officials would like to start the process.
“We think Powell probably agrees with Governor Brainard and President Williams that the job market is not yet mature enough. We continue to wait for the first index in August or September, followed by an official announcement in December and the start of the reduction early next year, ”Goldman economists said in a note.
Inflation has been a key topic of discussion among financial experts recently, and the central bank is expected to raise its inflation forecast for this year after warmer-than-expected readings over the past two months. The consumer price index jumped 5% in May alone. The Fed, so far, has said the rise in inflation is likely transient and the result of disrupted supply chains and suppressed demand.
Analysts predict that Powell could comment on the need to monitor inflation data more closely and make faster changes if needed.
“It can become increasingly difficult for Powell to fire [inflation] as expected, ”Cabana said. “He’s likely to say, ‘We’re monitoring this. … We still think it will be transient, but we will be monitoring the data very closely. ‘”
Cabana expects growth and inflation forecasts to increase for this year and next. Fed officials currently forecast core PCE inflation at 2% in 2022 and 2.1% in 2023.
“How many spills in 2023 will be the real eye-opener. Do any of these inflationary pressures persist? Do they last a few years? Probably not, but we’ll see, ”he said. “Is the Fed going to forecast a rate hike in 2023 or not?” It only takes three Fed officials to shift to the rate hike camp for this to happen. We think it’s a tight call, but they probably won’t change.
Bank of America strategists don’t expect a hike in 2023. “We think they’ll stay in the ‘on hold’ camp, but that will be one of the main thrusts of the market,” Cabana said. “The market is forecasting 2.5 hikes by the end of 2023. The Fed is currently not expecting any.”
As has been the case periodically over the past two years, the overnight lending market has seen more activity and is another area where there could be discussions or changes in interest rates, according to Cabana.
“On the IOER and the overnight repo facility, we believe they will make a modest adjustment in setting these interest rates, [by] 2 or 3 basis points. This will be done to ensure the resilience of [the Fed’s] zero floor rate and prevent money market funds from being negative, ”Cabana said. “There is really too much money in the banking system. The banks don’t want it. They push it to money market funds … and money market funds tell us they don’t want it either. Treasury bill rates are close to zero. … They are all hoping for an adjustment like this reunion.
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IVOL seeks to hedge the risk of increased volatility in fixed income securities and rising inflation and to profit from rising long-term interest rates or falling short-term interest rates. term, often referred to as a steepening of the interest rate curve in the United States, while providing income protection against inflation. The fund invests in a combination of TIPS.
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