Waiting For The Fed


The US reports February housing starts. No doubt, any weakness will likely be attributed to the poor weather, though it would be the second consecutive decline. Rising wealth (via equities and house prices) and low-interest rates have helped fuel strong residential investment during the pandemic. Housing starts reached their best level in December since 2006. The Jan-Feb pullback is likely minor.  

The FOMC meeting and Powell's press conference is the event of the day. The Fed's statement can easily and quickly be digested.  It is fairly formulaic. The first paragraph offers the Fed's high-level economic assessment. It will likely be upgraded from the "moderated in recent months" to something reflecting the stronger growth impulses and the fiscal stimulus. After recognizing the significance of the virus, the Fed's last two statements contained the identical description of the Fed's policy, including the long-term asset purchases ($120 bln a month). The Fed has indicated its asset purchases will continue until there is "substantial further progress" toward the targets. While there has been progress, it probably does not count as "substantial" from the Fed's vantage point. However, that there will be substantial progress over the next several months seems like a reasonable assumption. By the time of the next FOMC meeting (April 28), the US could be rapidly approaching herd immunity with a little bit of luck.  

The survey of economic projections (the dot-plot), like the statement and minutes, is part of the Fed's communication tools. Near-term growth forecasts are likely to be adjusted higher. Near-term inflation will make too. Here, the Fed's message is similar to the other major central banks:rising rates are a sign of confidence in the recovery, and that the rise in prices is mostly technical and will likely prove transitory. The market will also be sensitive to the likely shift in the anticipated timing of the first hike. Yellen had suggested that it is possible to see the labor market regain pre-Covid levels of employment in 2022. If true, then a rate hike sooner than the Fed currently anticipates. In December, only one official saw a hike next year as appropriate. The loner may have some company now. In December, five Fed officials saw a hike in 2023. Given the fiscal stimulus and the vaccine rollout, the Fed's confidence may grow, and more officials may push a hike into 2023.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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