Central Bank Watch: Fed Speeches, FOMC Minutes, Interest Rate Expectations Update
Central Bank Watch Overview:
- In the extended period between the April 28 and June 16 meetings, market participants have been offered numerous chances to listen to a litany of Fed policymakers discuss the state of the US economy.
- Even though higher price pressures have been realized, Fed policymakers have been resolute in their intent on keeping policy on hold at present time.
- Fed fund futures don’t anticipate greater than a 10% chance that rates markets will be moving higher before early-2022.
In this edition of Central Bank Watch, we’ll review the speeches made over the past week by various Federal Reserve policymakers, including the Fed Chair himself. In the extended period between the April 28 and June 16 meetings, market participants have been offered numerous chances to listen to a litany of Fed policymakers discuss the state of the US economy. More speakers are due ahead in the coming days, so the congo line of ‘keep calm and carry on’ messaging will continue.
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FOMC Dances Around the ‘T Word’
Federal Reserve policymakers are balancing a generally improved US economy against the seemingly fragile state of the recovery (from their point of view). Even though higher price pressures have been realized, Fed policymakers have been resolute in their intent on keeping policy on hold at present time. Even statements that seemingly appear hawkish on the surface are merely ‘sheep dressed in wolf’s clothing’ (a dove with hawk’s feathers?).
May 12 – Clarida (Fed Vice Chair) says that the sharp rise in the April US inflation rate came as a surprise, but that he expects “inflation to return to – or perhaps run somewhat above – our +2% longer-run goal in 2022 and 2023.”
Bostic (Atlanta president) notes that a “fair amount of volatility in inflation” data is expected as the economy reopens, while also suggesting that he’s “not seeing excessive froth in financial markets.”
May 13 – Barkin (Richmond president) downplays inflation fears, referencing a discussion with businesses in his Fed district, saying that he doesn’t “hear their medium- to long-term expectations of inflation changing.” In what may be perceived as a hawkish comment, he also commented that he was “hopeful we are on the brink of completing the recovery.”
Bulard (St. Louis president) says that inflation could rise above the Fed’s +2% target, which “would be a welcome development for FOMC, as inflation has generally been below target for many years.”
Waller (Fed governor) pushes back against taper tantrum fears developing around recent inflation data, saying “we will not overreact to temporary overshoots of inflation.”
May 14 – Mester (Cleveland president) says “my baseline scenario for inflation is we’re going to have higher inflation this year, above 2%, but then as some of those constraints on supply ease I think we’re going to see inflation go back down and we’ll have to monitor that as we go forward.” Furthermore, striking a dovish tone, “this is not the time to be adjusting anything on policy. It really is a time for watchful waiting, seeing how the recovery evolves.”
May 17 – Clarida comments that “the way in which we bring supply and demand into balance in the labor market, especially in the service sector, may take some time and may produce some upward pressure on prices as workers return to employment.” In other words, higher wages are welcomed by the Fed.
May 19 – Bullard preaches patience, saying he’s against “trying to do anything to change policy when we’re still in the pandemic,” specifically looking for more “evidence” in the US economy prior to “tapering purchases.”
Quarles (Fed Vice Chair) downplays fears that inflation is running away from the Fed, saying “the Federal Reserve has the tools to address inflationary concerns should they prove to be more durable and higher than we currently analyze them to be.”
Bostic sets out a milestone in the US labor market that’s necessary to be achieved before “advocating for [the FOMC] moving policy,” noting that the US economy is “still 8 million jobs short” of its pre-pandemic workforce.
April FOMC meeting minutes summarize that “a number of participants suggested that if the economy continued to make rapid progress toward the committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.” ‘Adjusting the pace of asset purchases’ is another way of saying ‘tapering. However, this is a veryconditional statement, predicated on the US economy continuing to march towards the Fed's goals at a rapid pace, which the Fed says isn't now. Even then, tapering itself won’t begin; only the discussion about when it’s appropriate to taper will.
Federal Reserve Interest Rate Expectations (May 20, 2021) (Table 1)
After the April FOMC meeting minutes, interest rates remain well-anchored; all quiet on the western front, as it were. Fed funds futures are still pricing in a 90% chance of no change in Fed rates through January 2022; an insignificant change from the 91% probability the last time this report was updated.
IG Client Sentiment Index: USD/JPY Rate Forecast (May 20, 2021) (Chart 1)
USD/JPY: Retail trader data shows 52.17% of traders are net-long with the ratio of traders long to short at 1.09 to 1. The number of traders net-long is 5.25% higher than yesterday and 15.51% higher from last week, while the number of traders net-short is 7.82% higher than yesterday and 7.72% lower from last week.
Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed USD/JPY trading bias.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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