Tuesday's Market Minute: Market Has A Close Eye On FOMC Meeting

The market is closely eyeing the Fed, much like how the Fed must be keeping tabs on with how quickly the yield curve is steepening. Most likely Fed Chair Powell will rely on the short-term risks to the economic outlook to defend the central banks’ ultra-easy monetary stance. Wall Street expects the Fed to signal interest rates will remain near zero through 2023. When discussing inflation, we can expect Powell will note that price increases later in the year will not be large or persistent, but rather transitory in nature as business continuity resumes normalcy. Solid U.S. growth expectation due to the Covid-19 vaccine rollout success will make it harder for Powell to deflect calls for future inflation and tightening. Powell may mention how COVID cases and hospitalizations might be rising in some states and that could pose a key risk to the reopening of the economy.

Based on how the market reacted to the last time Powell made a public statement, I suspect the market could use some new or modified quantitative easing guidance on suggestive language as to how the Fed intends to adjust its asset purchases. Perhaps the Fed will use a 10-year yield target between 1.75 and 2.0%, whereby modified asset purchases might best be used within or even north of that range. Based on the immense coordinated monetary and fiscal policy, the Fed might need to nudge long rates a bit lower to ensure credit and capital flows are well-functioning, or a potential shock to borrows does not impede an economy in recovery. Let’s see if Jerome and company indulge us with a hint of some operation twist, weighted average maturity (WAM) targeting, or yield curve control (YCC) all of which are tools that the Fed could resort to later this year.

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