What should you watch for when the Fed meets Wednesday?
“Federal Reserve Chairman Jerome Powell must thread the needle in the coming days. On the one hand, the economy seems to be stumbling as the year draws to a close given the alarming spread of the coronavirus across the entire country. On the other, economic activity is expected to recover sometime next spring or summer as COVID-19 vaccines become widely available. Should the Fed take any more action to help the economy bridge the pandemic? Or is the best bet waiting for more economic relief from Congress? Washington lawmakers seem tantalizingly close to a deal by the end of the week, yet it could be another false dawn for a fifth round of COVID-19 fiscal relief.
Despite the twists and turns of the soap opera centered on COVID spending, financial market conditions have remained healthy all summer and fall, helped in large measure by the Fed’s purchases of $80 billion of Treasurys and $40 billion of mortgage-debt each month. Yields on the 10-year Treasury note TMUBMUSD10Y, 0.904% have remained range bound under 1% even as equity markets have soared on belief that Fed policy will remain easy. The central bank will issue an updated policy statement along with new economic projections at 2 p.m. Eastern. Powell will follow with the news a half-hour later. There is no consensus view among economists about what decisions Powell will take at this week’s meeting.
“That there will be no change in the Fed funds rate target range is the only thing about this week’s FOMC meeting that seems certain. Beyond that, every facet of the meeting, starting with the post-meeting policy statement and ending with Chairman Powell’s post-meeting press conference, comes with questions,” said Richard Moody, chief economist at Regions Financial Corp. Here’s a look at what economists and investors will be watching for when the Fed concludes the two-day meeting on Wednesday.
The Dots: When will inflation reach 2% target?
Economists will be watching closely for any changes to Fed view on when its benchmark policy rate might rise off zero. In September, the Fed said it didn’t expect rates to rise until after the end of 2023. Only four of the 17 officials projected the benchmark rate to rise in 2023. “We wouldn’t be surprised to see if that number is larger in the updated dot plot, even if the median dot continues to imply no rate hikes,” said Moody of Regions Financial.
The Fed has penciled in above-target 2% inflation, notes the economics team at Bank of America Merrill Lynch. That is because the market cuts through the Fed talk and senses that once inflation gets to 2%, presumably rate hikes will follow. In September, the Fed didn’t see inflation at 2% until 2023. The market has priced in the first rate increase later that year, according to BofA economists. Economists will be watching closely for any changes to Fed view on when its benchmark policy rate might rise off zero.”