June FOMC Preview:
- The Federal Reserve has made clear that it will be keeping rates low and stimulus flowing for the foreseeable future.
- Setting aside the fact that interest rates hikes won’t rise soon, all focus is on the timing of when the Fed will taper its asset purchase program.
- Will the Fed begin taper talk? Will US Treasury yields continue their rebound? Is the US Dollar bottoming or getting ready for its next breakdown? We’ll discuss these questions and more in context of the June Federal Reserve rate decision starting at 13:45 EDT/17:45 GMT. You can join live by watching the stream at the top of this note.
The End is Nigh? Not Quite
The Federal Reserve has made clear that it will be keeping rates low and stimulus flowing for the foreseeable future. Setting aside the fact that interest rates hikes won’t rise soon, all focus is on the timing of when the Fed will taper its asset purchase program. For now, the FOMC will very likely decree that the current pace of asset purchases will continue unabated.
Federal Reserve Interest Rate Expectations (June 16, 2021) (Table 1)
Proving increasingly stable, Fed funds futures continue to discount an approximate 10% chance of a change in Fed rates each monththrough January 2022. Nevertheless, the liquidity drain continues thanks to record high reverse repo volumes across the Fed’s open markets desk. Without a corresponding rise in US Treasury yields, we’re effectively starting off on the course of a tantrumless taper.
Taper Timeline
Accordingly, the June Federal Reserve meeting is likely to kickoff taper talk, insofar as policymakers will acknowledge that the FOMC has moved from ‘thinking about talking about tapering’ to actually ‘talking about tapering.’ Nevertheless, the it appears that market participants continue to have the taper timeline priced as such (which is why the dot plots showing a hike in 2023 might not cause friction):
- June through September 2021 = start of taper talk
- August/September 2021 = indication taper is coming
- December 2021 = taper targets announced
- January 2022/March 2023 = taper begins
- September/December 2022 = taper ends
- March 2023/June 2023 = first rate hike (3-6 months post-end of taper)
Will the Fed begin taper talk? Will US Treasury yields continue their rebound? Is the US Dollar bottoming or getting ready for its next breakdown? We’ll discuss these questions and more in context of the June Federal Reserve rate decision starting at 13:45 EDT/17:45 GMT. You can join live by watching the stream at the top of this note.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
