undefined
Traders returning from the long holiday weekend will turn their attention to more comments from the Federal Reserve, with the Federal Open Market Committee’s latest minutes of the meeting and a speech by Fed Chairman Jerome Powell on the deck. There are relatively few new economic data reports or corporate earnings results available.
The minutes of the FOMC meeting, which will be available on Wednesday afternoon, will shed light on members’ thoughts from their March meeting. At the end of that meeting, the central bank’s median forecast for economic growth was sharply revised upwards, reflecting the improved growth trends as the path of new COVID-19 infections improved and vaccinations widened. The central bank said it expects real GDP to grow by 6.5% this year, up from the 4.2% rate it expected in December. The Fed also said that the unemployment rate would improve to 4.5% by the end of the year before returning to its pre-pandemic level of 3.5% by 2023.
Despite these improved forecasts, the Fed has continued to telegraph that interest rates are likely to remain at current near-zero levels by 2023, with the central bank maintaining its ultra-accommodative monetary policy despite a faster-than-expected economic recovery. Market participants were wary of this message, and the Fed suggested a stubborn trend toward easy monetary policy, even with rising inflation. The Fed’s latest forecast showed that the median member believes that core inflation would rise to 2.4% this year, which would reach and exceed the Fed’s target of 2% two years earlier than previously expected.
Fed Chairman Powell told a news conference in mid-March that inflation had to be “on track for some time to exceed 2% moderately” in order to consider the Fed reaching its inflation target and raising rates. However, the allegation has left room for interpretation by market participants, leading many to speculate that the Fed will be forced to adjust its policies sooner than it has recently telegraphed.
‘Predict disagreement’
According to a recent survey by Deustche Bank, “the current gap between the market and the Fed is mostly about predicted disagreement. In particular, respondents expect the core PCE in the 2.2% -2.3% range in 2022 and 2023 a more hawkish Fed response, “Deutsche Bank economist Matthew Luzzetti wrote in a note.” While learning at the FOMC meeting that the core PCE was 2.1% [personal consumption expenditures] Inflation is not enough to cause a lift, it is still unclear whether inflation rates in the 2.2% -2.3% range – as expected by our survey and market prices – would be high enough to cause the Fed to shrink. This ambiguity is one disadvantage of the Fed’s flexible approach to inflation targeting (FAIT), which leaves key parameters undefined. ”
“If the Fed were to clearly indicate that core PCE inflation in the 2.2% -2.3% range for a year or two was in line with their view of FAIT and would not cause a tightening of monetary policy not, it can affect the price of the market, “he said. added. Conversely, if the FOMC believes that they would raise rates in response to these inflationary realizations, then the market is currently praising an appropriate response function and it will take some time to decide whether the Fed or the market is correct. about the continuing inflation shock. ‘
But while the jury appears to be among market participants regarding the timing of the next rate hike, many agree that the first step toward the Federal Reserve is likely to take place in their asset-buying program in the crisis era. Fed Chairman Powell said the central bank would be looking for “significant further progress” – and specifically “actual progress” in the data and not “forecasting progress” – in the direction of the Fed’s employment and inflation targets before he would consider them.
However, with the latest number of March economic data exceeding estimates, the Fed may soon provide firmer guidance on its plan to reduce the $ 120 billion-a-month asset purchase program, which only comes into effect at the start of the pandemic set. year.
“Financial conditions need to remain properly accommodating for a while, and we believe this could be an overshoot,” RichRieder, chief investment officer at BlackRock, said in a note. “We think the Fed should be able to cut asset purchases sooner than many people expect, and perhaps by the end of the year, or early next year, which indicates that the announcement of its plan could already be made at the June meeting. takes place. ”
Although the forthcoming minutes of the meeting will not take into account the FOMC members’ assessment of the latest amount of economic data, it will give market participants a sense of whether some members were inclined to pass the first signs of a faster than expected economic recovery. in the direction of monetary policy.
That said, Fed Chairman Powell’s public remarks this coming Thursday will provide a quicker picture of central bank policy thinking. Powell will speak in a panel of the International Monetary Fund on the world economy on Thursday afternoon.
The discussion will take place about a week after the March Labor report of the Labor Department, which showed a much better than expected profit of 916,000 non-farm payrolls and a drop in the unemployment rate to 6.0%. In addition, the Institute of Supply Management’s Manufacturing Purchasing Managers’ Index unexpectedly jumped to a 37-year high last week, with participation in the survey already referring to a rise in commodity prices and a mismatch between supply and demand that could push up prices. aggravate. Market participants will be watching Powell’s address to see if these prints move the needle in the Fed’s monetary policy forecasts.
“We expect the volatility in Fed views to become clearer over the coming months as the data comes in,” RBC Capital Markets economists wrote in a note last week.
Economic calendar
-
Monday: Markit US Services PMI, March Final (60.2 expected, 60.0 in preliminary print); Markit US Composite PMI, March Final (59.1 in pre-print); ISM Services Index, March (58.7 expected, 55.3 in February); Factory orders, February (-0.5% expected, 2.6% in January); Orders for durable goods, February final (-1.1% expected, -1.1% in previous print); Orders for durable goods, excluding transport, February final (-0.9% expected, -0.9% in previous print); Orders for non-defense capital goods excluding aircraft, final in February (-0.8% in previous print); Non-defense capital goods, excluding aircraft, February final (-1.0% in pre-print)
-
Tuesday: JOLTS Job Openings, February (6.944 million expected, 6.917 million in previous print)
-
Wednesday: MBA Mortgage Applications, week ended April 2 (-2.2% during previous week); Trade balance, February (- $ 70.5 billion expected, – $ 68.2 billion in January); Consumer Credit, February ($ 2.8 trillion expected – $ 1.315 billion in January) FOMC Meeting Minutes, March Meeting
-
Thursday: Initial unemployment claims, week ended April 3 (690,000 expected, 719,000 during previous week); Continued claims, week ended March 27 (3,794 million during previous week)
-
Friday: Producer price index, month-on-month, March (0.5% expected, 0.5% in February); Producer price index excluding food and energy, month-on-month, March (0.2% expected, 0.2% in February); Producer price index, year-on-year, March (expected 3.8%, 2.5% in February); Producer price index excluding food and energy year-on-year, March (2.7% expected, 2.5% in February); Wholesale, month-on-month, February final (0.5% expected, 0.5% in previous print)
Earnings calendar
–
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
Read more about Emily: