Fed Speech, FOMC Minutes, Interest Rate Expectations Update
Overview of central bank supervision:
- During the extended period between the April 28 and June 16 meetings, market participants were afforded ample opportunity to listen to a litany of Fed policymakers discuss the state of the US economy.
- Even as higher price pressures have arisen, Fed policymakers have been resolute in their intention to keep the policy on hold for the time being.
- Fed funds futures do not anticipate more than a 10% chance that the rate markets will move higher before the start of 2022.
Chat between meetings
In this edition of Central Bank Watch, we Review speeches made over the past week by various Federal Reserve policymakers, including the Fed Chairman himself. In the extended period between the April 28 and June 16 meetings, market participants were afforded ample opportunity to listen to a litany of Fed policymakers discuss the state of the US economy. More speakers are expected in the coming days, so Congo’s “Keep Calm and Carry On” message line will continue.
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The FOMC dances around the ‘T Word’
Federal Reserve Policy Makers balance a generally improved US economy and the apparently fragile state of recovery (from their perspective). Even though higher price pressures have materialized, Fed policymakers have been resolute in their intention to keep the policy on hold for now.. Even statements that seemingly belligerent on the surface are nothing but “sheep dressed in wolf clothes” (a dove with hawk feathers?).
May 12 – Clarida (Vice President of the Fed) says that the sharp rise in the inflation rate in the United States in April was a surprise, but that he expects “inflation to return – or may exceed -be somewhat – our longer-term objective of + 2% in 2022 and 2023. ”
Bostic (president of Atlanta) notes that “quite a bit of inflation volatility” is expected with the reopening of the economy, while also suggesting that he “does not see excessive foam in the financial markets”.
May 13 – Barkin (Richmond president) downplays inflation fears, referring to a discussion with businesses in his Fed district, saying he “doesn’t hear their mid- to long-term expectations of developments of inflation ”. In what can be seen as a hawkish comment, he also said he was “hopeful that we are on the verge of completing the recovery.”
Bulard (president of St. Louis) says inflation could exceed the Fed’s + 2% target, which “would be a welcome development for the FOMC, as inflation has generally been below target for many years. “.
Waller (Fed governor) brushes aside fears of a tantrum that are building around recent inflation data, saying “we will not overreact to temporary inflation overruns.”
May 14 – Mester (president of Cleveland) says “mThe baseline scenario for inflation is that we’re going to have higher inflation this year, above 2%, but as some of those supply constraints relax, I think we’re going to see inflation. come back down and that we will have to watch as we go along. Also, striking a dovish tone, “tNow is not the time to change anything about politics. Now is the time to watch carefully, to see how the recovery unfolds. “
May 17 – Clarida comments that “tThe way we balance supply and demand in the labor market, especially in the service sector, can take some time and produce some upward pressure on prices as workers return to employment. employment.. In other words, the higher wages are welcomed by the Fed.
May 19 – Bullard preaches patience, saying he is against “trying to do anything to change policy while we are still in the pandemic”, specifically looking for more “evidence” in the US economy before ” reduce purchases ”.
Quarles (vice chairman of the Fed) downplays fears that inflation will flee the Fed, saying “tThe Federal Reserve has the tools to address inflationary concerns if they prove to be longer lasting and higher than what we are currently analyzing.. “
Bostic defines a milestone in the American labor market that must be crossed before “pleading for [the FOMC] shifting policy, ”noting that the US economy is“ still short of 8 million jobs ”of its pre-pandemic workforce.
The April FOMC meeting report summarizes that “a a number of participants suggested that if the economy continues to move rapidly towards the committee’s goals, it might be appropriate at some point in upcoming meetings to start discussing a plan to adjust the pace of asset purchases.“ “Adjusting the pace of asset purchases” is another way of saying “shrink”. However, it is a veryconditional statement, based on the fact that the US economy continues to move towards the Fed’s targets at a rapid pace, which the Fed says is not now. Even then, the shrinkage itself will not begin; only the discussion about when it is appropriate to reduce willpower.
Federal Reserve interest rate expectations (May 20, 2021) (Table 1)
After the minutes of the April FOMC meeting, interest rates remain well anchored; all quiet on the western front, so to speak. Fed funds futures still have a 90% chance of not changing Fed rates until January 2022; an insignificant change from the 91% chance the last time this report was updated.
IG Client Sentiment Index: USD / JPY rate forecast (May 20, 2021) (Chart 1)
USD / JPY: Data from retail traders shows that 52.17% of traders are net long with the ratio of long to short traders of 1.09 to 1. The number of net long traders is 5.25% higher than ‘yesterday and 15.51% higher than last week, while the number of net-short traders is 7.82% higher than yesterday and 7.72% lower than last week.
We generally take a vexing view of crowd sentiment, and the fact that traders are net long suggests that USD / JPY prices may continue to decline.
The positioning is shorter than yesterday but longer than last week. The combination of current sentiment and recent changes gives us another mixed USD / JPY trading bias.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist