US: What To Expect From The December FOMC Meeting

Business investment plans that have been put on hold for more than 12 months may quickly get put into action and if we then get another fiscal stimulus package on the order of 3-4% of GDP under President Biden, this could be a recipe for very vigorous growth from 2Q21 onwards. This is likely to be reflected in upward revisions to Fed forecasts.

Previous Fed forecasts & ING's expectations for new Fed predictions (%)

(Click on image to enlarge)

Source: Federal Reserve, ING

Inflation may also start to move onto the radar with vibrant demand coming up against supply constraints in many sectors – examples include numerous bars and restaurants that have permanently closed or airline fleets that have been cut back. In any case, there will be some upward pressure on annual inflation rates as the sharp price falls experienced during the height of the pandemic drop out of the annual comparison.

Following the BoC’s lead?

We suspect the yield curve will steepen further in this environment with 10Y benchmark government borrowing costs set to test 1.5% in 2021. Should it rise swiftly, the Fed may adopt the Bank of Canada’s strategy where it “recalibrated” its quantitative easing program in October by shifting asset purchases towards the longer end of the yield curve while lowering the weekly purchases from “at least C$5bn” to “at least” C$4bn.

The BoC’s argument was that household and corporate borrowing costs tend to be more influenced by longer-term government borrowing costs, which is the same as in the US, so by focusing spending there they could achieve the same amount of stimulus using less ammunition. This is a neat way of starting to extricate themselves from the situation the BoC finds itself in and we suspect will eventually be replicated by the Federal Reserve – just not yet.

And there may or may not be some technical nuances discussed

The Federal Reserve may comment on the pushes and pulls likely on the money market in the coming months. Liquidity in the system will be affected by the spend of a chunk of the $1.5bn of reserves built by the Treasury and held at the Fed. This effectively gets injected into the system. And at the same time, T-bill issuance is set to fall, which means that this liquidity does not get mopped up easily. In consequence we could see some downward momentum in ultra-short money market rates.

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Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information ...

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