Submitted by Newsquawk
The June FOMC caught the market by surprise after the accompanying Dot Plot saw multiple 25bps hikes penciled in for 2023 via the median dot, and an increasing number of dots forecasting a hike as soon as 2022 from the current Zero Lower Bound.
The Core PCE inflation forecast was unsurprisingly bumped up to 3.0% from 2.2% following a string of hot inflation prints, although the Fed still sees that fading into next year.
The statement was little changed, although did acknowledge progress on vaccinations, whilst continuing to express the need for support until its “average 2% over the longer run” and maximum employment goals have been met.
Market participants are looking out for when the QE tapering process would begin and in what manner. Chair Powell said in his Q&A that this was the “talking about talking about” tapering meeting, noting that progress has been made, but there is still a ways to go; said it will be appropriate to consider a plan for tapering at the coming meetings if progress continues.
In wake of the meeting, most of the core Fed members (permanent voters) have stressed that the labor market is not close to “substantial further progress” and have been cautious not to express urgency in tapering ambitions. However, there has also been a fair amount of regional Fed Presidents which have shown more urgency to get purchase tapering underway, and given Powell’s comments at the Q&A, the Minutes should reflect the common view that tapering discussions should begin in the coming meetings.
A talking point among some officials in recent weeks has been on the mechanics of tapering, and whether or not it should be completed before rate lift-off, although a large majority agree any hikes should not take place until there are no more asset purchases.
Nonetheless, the Minutes could give us some more details around the tapering debate:
- a timeline;
- the pace of tapering (i.e. USD 10/bln per month);
- whether to reduce MBS purchases first given the booming housing market.
Finally, the June meeting saw the IOER and RRP (administered rates) hiked by 5bps each in an effort to address money market issues as many STIRs had been flirting with negative rate territory, despite the target EFFR holding relatively firm.
The Minutes should provide some color around the decision, which was also somewhat unexpected, as the Fed appears to be showing some greater concern about where other money market rates trade aside from its benchmark EFFR.