Given ongoing volatility in Treasury yields, the Federal Open Market Committee (FOMC) meeting on March 16-17 will undoubtedly be the main focus for markets this week.
Since the FOMC last gathered on January 27, the economic outlook has brightened considerably with evidence that the economy has begun to emerge from a winter of despair. The vaccine rollout is progressing, and the Biden administration cemented a US$1.9tn Covid-19 relief package.
This brighter outlook will appear in the Committee's updated projections, with a substantial upward revision to growth, lower unemployment forecasts and a modestly higher inflation trajectory. And, reflecting these upgrades, the median dot is possible to show one or even two rate increase by the end of 2023. However, despite this improved outlook, the Chair of the Federal Reserve, Jerome Powell, is likely to continue to beat the dovish drum and emphasize that significant uncertainties remain and that large gaps persist between the current and pre-Covid economies – particularly concerning the labour market.
(Source: Fed Reserve)
As such, Powell is expected to reiterate that any discussion of tapering is "premature" and that it will likely be "some time" before the Committee can assess when to taper. There is, however, one policy mention that could help risk; the Supplementary Leverage Ratio (SLR) calculations may be extended on Wednesday.
Turning to Powell's press conference, he will likely look to avoid presenting an overly optimistic picture about the outlook, noting that the future trajectory for the economy continues to rely heavily on the evolution of the virus and vaccine distribution in the coming months, for which there are remaining uncertainties.
There were five dots for liftoff by 2023 back then, and while the street only expects another 2-3 dots to join them, which would keep the median dot at no hike, it’s a close call. Four dots showing liftoff would bring the median dot to a hike in 2023, so this could be the sort of signal the market would take as an approaching taper signal. Risk markets are placing the probability of this happening at 25%, but macro traders like those odds. And even if nothing happens, it’s still just a matter of time.
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US equities continue to welcome any high-risk event being put in the rear-view mirror – especially when rates markets look prime to consolidate lower