FED: Upward Surprise To December’s Projections But Powell To Throw Cold Water Over Taper Talk

Jerome PowellJerome Powell, chair of the US Federal Reserve.

Monex Europe | The Federal Reserve’s Open Market Committee concludes its two-day meeting on Wednesday 27th, with the monetary policy statement released at 19:00 GMT and a press conference held by Chairman Jerome Powell shortly after. With no fresh economic projections, we expect the FOMC’s monetary policy statement to remain largely unchanged, although references to weak incoming data may be eluded to.

Beyond that, markets will have to wait for Jerome Powell’s press conference and the subsequent release of the FOMC’s meeting minutes on February 17th for additional details. Despite the weak data since December’s meeting, developments in the fiscal space along with vaccine distribution pose upside risks to previous forecasts. The Senate has since passed a $900bn fiscal stimulus package, while the Democrat wins in the Georgia elections suggest additional stimulus will be announced before the Fed’s next meeting in March.

Moreover, Biden’s more aggressive stance on tackling the pandemic and his commitments to vaccine distribution bode well for the reopening of the US economy, however many hope that the plan to administer 100m vaccines in 100 days is a low hurdle as opposed to a realistic goal. On net, however, the developments since December are likely enough to see Chair Powell strike a cautiously optimistic tone in Wednesday’s meeting, similar to that struck by central bank governors in Europe and Canada last week. But, Jerome Powell will have to tread carefully in doing so to not embolden claims for earlier policy normalisation.

Attention will be particularly centred on the discussion of QE tapering. Previous comments by regional Fed members Bostic and Kaplan stoked markets into pricing in the possibility of bond market support fading by year-end. When combined with news of an additional $1.9trn fiscal stimulus package being floated in Washington, this resulted in rising 10-year yields, which has been one driver of the USD rebound witnessed at the beginning of this year. A quicker vaccination campaign being rolled out since December has also added to a brighter economic outlook, bringing the discussion of policy normalisation to the table.

Despite signals from regional Fed members that the central bank could slow down its role in bond markets ahead of expectations, Chairman Jerome Powell has promptly assured investors this isn´t happening any time soon. The Federal Reserve is drawing on lessons learned from the “taper tantrum” of 2013 to avoid stoking market expectations prematurely. Such an act would only result in tighter financial conditions, which will ultimately undermine efforts to support the economic recovery. Powell will endeavour to make sure 2013’s mistakes aren’t repeated this time around, reinforcing expectations of sustained support throughout the year.

Although the Fed has also indicated that any reduction in the pace of asset purchases will be communicated well ahead of time, this isn’t likely until the latter part of 2021 in our view. Even when the Fed does start reducing its monthly purchases, it will only gradually ease them, while staying on standby should economic conditions deteriorate or bond market dynamics undermine the recovery.