US: What To Watch At The March Fed Meeting

ING's expectations for updated Federal Reserve forecasts versus December 2020

Source: ING, Federal Reserve

Financial conditions are a key concern

Such a move could also give the market ammunition to push bond yields higher - note we hit a one-year high of 1.64% on the 10Y treasury on Friday. We don’t think the Fed wants to see that happen since it would lead to a tightening of monetary conditions when we aren’t yet guaranteed to be in the clear regarding Covid-19 despite positive news. In this regard, Powell’s comments on the rapid rise in Treasury yields on 4 March – it “was something that was notable and caught my attention” – was telling.

He added “I would be concerned by disorderly conditions in markets or a persistent tightening in financial conditions that threatens the achievement of our goals… If conditions do change materially, the [FOMC] committee is prepared to use the tools that it has to foster achievement of its goals.” Given this statement, we have to imagine the Fed will be looking to bat away comments on tapering the $120bn per month of asset purchases and the bringing forward of rate hike expectations.

Bond markets will remain nervous

Nonetheless, bond investors will be wary of perceptions that the Fed could potentially allow the economy to run too hot for too long. After all, $1400 stimulus payments (part of the recently approved $1.9tn stimulus package) have already started to hit some Americans’ bank accounts with the bulk being distributed this week and next. Household balance sheets are already in great shape and with a reopened economy likely to generate significant employment gains in the coming months, we are looking for the economy to grow 6.5% this year.

At the same time, inflation is set to accelerate to well above 3% and once the economy reopens, we expect President Biden to swiftly switch to the centerpiece of his election manifesto – the Build Back Better program of $3tn+ of infrastructure and Green energy investment.

Mid-terms play an important role

Joe Biden is well aware of the potential pitfalls of the 2022 mid-term elections. Turnout is typically low at mid-terms - 35-40% versus the 66.3% seen at the 2020 election - and usually result in a president suffering a bloody nose at the hands of the electorate. In the 21 mid-terms since 1934 only on two occasions has the president’s party gained seats in both the House and the Senate – FD Roosevelt & George W. Bush in 2002. Modern mid-term elections have resulted in an average loss of 26 seats in the House of Representatives and four seats in the Senate by the political party whose president occupies the White House. If repeated, this would give the Republicans control of Congress and Biden would become a lame-duck president, so history suggests he needs to act swiftly.

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