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Fed Debate Moves to Bond Taper and Liftoff

By Steve Matthews

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What You Need to Know

  • This will be among the most watched of FOMC meetings — possibly “the most important Fed meeting in Jay Powell’s career,” billionaire investor Paul Tudor Jones said on CNBC.
  • Wall Street’s focus will be on the “dot plot,” which shows policymakers’ projections of the target interest rate.
  • Powell's current four-year term as chair ends in February, and Biden is expected to offer him another term.

With inflation and economic growth accelerating this year, Federal Reserve Chair Jerome Powell and his colleagues may consider moving up a discussion on scaling back monetary stimulus and penciling in a first interest rate hike as soon as 2023.

The Federal Open Market Committee is all but certain to hold interest rates near zero at the conclusion of a two-day policy meeting Wednesday, and repeat a vow to keep buying bonds at the current $120 billion monthly pace.

The panel will release a statement and quarterly economic forecasts at 2 p.m. in Washington, and Powell will hold a press briefing 30 minutes later.

“I think what we will hear from Chair Powell is that they have sort of agreed that it will be prudent to start those conversations in coming meetings,” said Julia Coronado, a former Fed economist and president of MacroPolicy Perspectives. “Depending on the next couple of jobs reports, it could happen as soon as July that they start these conversations.”

Upgraded Forecasts

This will be among the most watched of FOMC meetings — possibly “the most important Fed meeting in Jay Powell’s career,” billionaire investor Paul Tudor Jones said on CNBC, with inflation accelerating and the job market tightening.

Wall Street’s initial focus will be on the FOMC’s “dot plot,” which graphically displays policy makers’ projections of the target interest rate. Seven of 18 officials in March penciled in a 2023 rate hike, meaning that if three adjust their dots higher it would bring liftoff forward into that year.

The committee is likely to bump up its rate forecast, though it’s a very close call, according to economists surveyed by Bloomberg.

The FOMC may raise its economic growth forecast for 2021 to 6.6% and its inflation outlook to 2.7%, while looking for an unemployment rate of 4.7%, which is a slower pace of improvement than seen in March.

“Investors will look first at the dot plot,” said Joseph Lavorgna, Natixis chief economist for the Americas. “I would guess the dot plot becomes a little more hawkish as the committee will be looking at higher inflation and higher GDP forecasts for this year and next year. The median is likely to move up.”

Powell and his colleagues have described inflation’s recent surge as transitory, the result of reopening the economy in the wake of Covid-19 and supply disruptions.

The 2022 and 2023 inflation forecasts are likely to be closely watched to see if they confirm the central bank continues to view price issues as temporary.

FOMC Statement

“We expect the Federal Reserve to keep interest rates on hold and maintain its assessment of the recent inflation surge as ‘transitory.’ Policymakers remain committed to achieving their dual-mandate targets, with emphasis on full employment. Both interest rates and asset purchases will remain steady, even though the outlook has improved,” said Tom Orlik, chief economist in an FOMC statement.

The statement is likely to continue to reflect a positive outlook for growth as well as acknowledge higher inflation, while repeating that price gains largely reflect transitory factors.

The FOMC is expected to repeat that it will continue the pace of bond buying until “substantial further progress” has been made on employment and inflation, though it’s possible it could tweak the wording to acknowledge some progress.

“Maybe they remove the word ‘substantial’,” Coronado said. “Some evolution in the language makes sense.”

Press Conference

Powell could acknowledge that the FOMC will begin tapering discussions in upcoming meetings, borrowing a phrase from the minutes of the Fed’s April gathering that was subsequently  repeated by Vice Chair Richard Clarida, though also emphasizing patience and a commitment to achieving full employment.

With May’s consumer price index showing a 5% inflation surge, Powell may be pressed by reporters on how much of the price gains are temporary and whether Americans’ expectations on inflation are shifting.

The Fed approved a new framework calling for an average 2% inflation goal, including some overshooting for past misses, and the chair may be asked to explain what time frame is being averaged.

“I do think Powell will make tentative reference to the risks to the economic outlook ranging both to the upside and to the downside,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott. “Essentially, the warship is beginning to turn, but it’s likely to be a very long and drawn-out process which stretches into the second half of 2021.”

Powell’s characterization of the recovery may be parsed not only by markets but by the White House. His four-year term as chair ends in February and while he’s deflected all questions on the matter, he has done nothing to alter the impression that he’d like to stay in the job.

Most economists expect President Joe Biden will make him the offer, according to the Bloomberg survey.

Economists say it’s possible the Fed could tweak its interest rate on excess reserves, currently 0.10%.

But such a move would be a technical adjustment that has no monetary-policy implications. Rather, it would be designed to help policymakers keep their benchmark federal funds rate within the target range. Nearly a third of economists expect a move this meeting.

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