Central Bank Watch: Fed Speeches, Interest Rate Expectations Update

HEADING TOWARDS JUNE FOMC MEETING

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. The June FOMC meeting is under two weeks away, and it’s becoming evident that policymakers are beginning to lay the foundation for initial QE tapering efforts.

TALKING ABOUT TALKING ABOUT TAPERING

The Federal Reserve will be keeping rates low and stimulus flowing for the foreseeable future. Even though interest rates hikes aren’t coming anytime soon, the timing of when the winddown of the Fed’s asset purchase program will begin will be a focal point for financial markets over the coming months.

May 27 – Kaplan (Dallas president) says that “Policymakers should be cognizant of a range of supply factors that may currently be weighing on employment. These factors may not be particularly susceptible to monetary policy.” This dovish call was underscored when he later said “you don’t want to be so preemptive that you choke off the recovery.”

June 1 – Bullard (St. Louis president) says “even though it’s a booming economy and GDP is growing leaps and bounds, I’m not sure employment is going to follow.”

Brainard (Fed governor) says that there are two-sided risks to the economy, as the recovery surges ahead even though millions of people remain unemployed as a result of the pandemic.

June 2 – Barkin (Richmond president) says that the “data don’t yet show many rebounds in overall wage growth,” suggesting that anecdotes from business contacts about labor shortages could ultimately result in wage growth.

Harker (Philadelphia president) hints at tapering, saying he thinks “it is appropriate for us to slowly, carefully move back on our purchases at the appropriate time.”

The Federal Reserve makes an announcement that it will gradually begin to sell its portfolio of approximately $13.6 billion of corporate debt purchased during the pandemic.

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