Fed Expected to Start Discussions Amid Heating Economy

16 Jun 2021 · 3rd Party Analysis

Fed Expected to Start Tapering Discussions Amid Heating Economy


In Summary

  • FOMC meeting to conclude with Jay Powell’s press conference
  • The markets anticipate hearing Fed’s outlook for the recovering economy

The Federal Reserve could start discussing scaling back its monetary policy as early as this week. Although it’s highly unlikely that Fed Chair Jay Powell will announce later today the central bank will shrink its asset purchase scheme of $120bn a month, he is expected to comment on it during his appearance.

Discussions over dialing back the vast monetary support are expected to be high on the agenda of Fed officials during this week’s meeting. The Federal Open Market Committee is set to meet Tuesday and Wednesday and wrap up the meeting with a press conference of Jay Powell, the Fed Chair.

Mr. Powell has signaled the central bank is committed to maintaining its monetary policy program for the “foreseeable future” until “substantial further progress is made” toward reaching Fed’s goals. The US central bank has two main targets, the first one being stable prices, and the second one – maximum employment.

Regarding the first goal, the standard was not only met but surpassed by more than twice the level of inflation sought by the Fed. The Federal Reserve has only two months of high inflation data to work with, and on that note, Fed policymakers have stated they need a longer streak of data to adequately assess higher price trends.

The Central Bank Eyes Its Target

The central bank aims to achieve a 2% inflation target, which was eclipsed by April’s 4.2% and May’s 5% inflation if the consumer price index is taken as a measure. The Fed, however, has a preferred measure of inflation, the Personal Consumption Expenditures Price Index (PCE). The PCE index also rose above the 2% rate and landed at 3.1% year-on-year for April. The second target, maximum employment is still far away as there are now about 8 million people less in the labor market compared with pre-pandemic levels of employment.

While both goals remain a work in progress, the market is getting increasingly nervous that the hands-off approach by the Fed could lead to an overheating economy carrying the potential to derail the economic recovery. The continued support by the Fed and the overflowing money by the government under Biden’s fiscal stimulus have led to dozens of record highs for stock market indexes.

Market participants are divided over Fed’s capabilities to handle rising inflation pressures. Some believe the narrative that very high inflation numbers are transitory and prices will return near the 2% target as soon as next year. Others are more inclined to view inflation will leave a more solid footprint on the economy.

Both sides agree on the point that it’s becoming much harder to justify the trillions of dollars injected into the US economy on an annual basis. As Jay Powell is preparing to speak today, traders and investors will be on the outlook for any signs of tapering that could kick off in recent months. Jay Powell is expected to reveal, at least vaguely, Fed’s next steps in the current challenging economic environment.

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