Thursday, August 18, 2022

First Federal Reserve meeting in 2021: five things to watch out for

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As the Federal Open Market Committee meets this week for its first meeting of 2021 – and the first since Joe Biden became president – the U.S. central bank faces a stalled economic recovery hampered by a high level of coronavirus case.

But the new year has also brought new prospects for additional budget support – for which President Jay Powell has strongly recommended to compensate for the economic damage inflicted by the pandemic.

Here are five things to watch out for when the Fed meets:

An economic turning point?

Since Fed officials met in December for their last meeting of 2020, evidence has accumulated that the economic recovery has lost momentum. New US unemployment claims remain extremely high and retail sales have slumped.

While the outlook for the next few months has darkened, the outlook for a stronger rebound in the second half of the year is brighter, leaving the Fed in a policy hold position.

Wednesday’s FOMC statement is unlikely to contain big changes in economic conditions, but Mr Powell could offer a better indication of the near-term outlook and whether his confidence in an improvement later this year still holds. – in particular in light of concerns about the pace of vaccination deployments.

The fiscal situation has improved since December, with the promulgation of an initial $ 900 billion stimulus deal. But Mr. Biden is trying to do more, starting with a emergency plan worth $ 1.9 billion. Even if it’s watered down by Republicans to $ 1 billion, as Natixis strategists predicted, that would still be a big boost.

Further help to come

The meeting will be the first since Mr Biden moved into the White House, and Mr Powell may need to clarify his position on the new administration’s top legislative priority.

Mr Powell had made no secret of his support for the latest budget deal to create a bridge over the winter to more favorable conditions for a recovery. But does he still believe that more tax support is needed, or does he agree with many Republicans that the Biden administration’s proposal could be overkill? And if Mr Powell supports further action, which areas should be the priority?

Conical speech

Investors are on the alert for signals that the Fed may consider reducing its support to financial markets as early as this year, as a robust economic rebound is expected to accelerate soon.

A handful of regional central bank presidents rocked the rate markets at the start of the month speculating that the Fed could start cutting its massive $ 120 billion per month asset purchase program by the end of 2021 Senior Fed officials, including Mr. Powell and Vice President Richard Clarida, aggressively repulsed on the calendar, highlighting the severity of the contraction caused by the pandemic and the risk of prematurely withdrawing from markets.

Mr Powell is expected to assert the Fed’s commitment to keeping its monetary policy extremely easy for the foreseeable future on Wednesday, but investors warn the central bank may have to reflect on its exit strategy soon.

Economists have revised their growth forecast for the year upwards, in light of the Biden administration’s $ 1.9 billion stimulus package. Market measures of inflation expectations have also exploded, with the 10-year break-even point derived from U.S. inflation-protected securities climbing well above 2 percent.

“We’re pretty optimistic that by the summer and fall of this year we’re going to be in a very different economic environment than today,” said Ken Taubes, director of investments for the United States. United at Amundi. “The heat in the kitchen is going to get hot enough for the Fed.”

New faces

A new set of voting members in the FOMC – who will influence the stance of the central bank’s monetary policy – will be installed this week.

The annual rotation involves Atlanta Fed President Raphael Bostic, Charles Evans of Chicago, Mary Daly of San Francisco, and Thomas Barkin of Richmond. They will replace the heads of the regional Fed banks in Philadelphia, Cleveland, Dallas and Minneapolis.

The four new voters give the committee “a slightly more accommodating composition,” according to Kathy Bostjancic, chief US financial economist at Oxford Economics. This makes it unlikely that the Fed will abruptly depart from its ultra-accommodative approach to weathering the coronavirus crisis.

Ms Bostjancic expects the Fed to tilt even more agreement once Mr Biden appoints someone to take the last seat on the board of governors. The post was left open after the US Senate blocked confirmation from Judy Shelton, fierce critic of the central bank.

A new Secretary of the Treasury

Mr Powell could also answer questions about the new leadership of the Treasury Department, after the US Senate confirmed the former Fed chairman Janet Yellen to take the head of the main agency responsible for the management of the American economy.

Mrs. Yellen takes the reins on the heels of a up to dust late last year, between the Treasury and the Fed over the fate of several loan programs aimed at helping small businesses, large corporations, and state and local governments deal with the financial panic induced by the coronavirus. Steven Mnuchin, Treasury secretary at the time, refused to extend the facilities beyond their December 31 expiration date, against the will of the central bank.

The urgency to reinstate these programs has diminished somewhat as markets hit new historic highs. But if volatility returns, “Biden’s Treasury will be more willing to work with the Fed,” said Bostjancic.


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