First reactions to yesterday’s FED meeting

Today’s FOMC meeting wasn’t quite the summer snooze investors were expecting, hitting a slightly more hawkish note as Powell noted the economy has made progress towards these goals.

Investor Relations Specialist

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The Fed announced at its meeting yesterday that it will maintain current interest rates at 0% to 0.25%, reiterating that inflation is mainly due to transitory effects. Here are the first impressions of the international fund managers.

Seema Shah, Chief Strategist at Principal Global Investors

Today’s FOMC meeting wasn’t quite the summer snooze investors were expecting, hitting a slightly more hawkish note as Powell noted the economy has made progress towards these goals. Yet, it still barely drew a market reaction, trying to build excitement around the fact that one word, ‘substantial,’ was dropped from the statement.

The statement repeated the Fed’s relaxed approach to inflation: despite the upside surprise to CPI and voices agonising that inflation may be stickier than first believed, the Fed remains resolutely in the ‘transitory’ camp. However, the minutes may prove an interesting read, likely exhibiting the contrasting views within the committee.

Christian Scherrmann, U.S. Economist at DWS 

While not changing monetary policy in the July FOMC Meeting, the Fed inched forward another notch by stating that “… the economy has made progress …” towards their goals of maximum employment and price stability. Therefore, tapering most likely was intensively discussed. But these discussions have not yet left the safe harbor of theory. We already know, from previous appearances of officials that there are ambiguous views among FOMC participants, but that most of them – despite different philosophies – share the view that it takes a “few meetings” to sort things out. It seems like the Fed is in no rush of giving us any definitive forward guidance on when purchases should be scaled back, as some uncertainties still prevail. Incoming economic data remains hard to read due to reopening effects.

Moreover, the economy has “not fully recovered” as the meeting statement tells us and the emerging Delta variant imposes yet another dose of pandemic uncertainty. Also, with another ambiguous topic, inflation, the Fed holds the course. “Largely transitory” most likely is the new code for somewhat accelerated inflation rates for the reminder of the year – something that itches policy makers but expectations management seems to be key right now. Sometimes it only needs a steady hand to cool down a heated debate.

Overall, the July meeting can be seen as just another step towards a monetary policy inflection point. The next step most likely is to explain what “sufficient further progress” looks like and how it is embedded via “Macroeconomic Policy in an Uneven Economy” – the motto of this year’s Jackson Hole Economic Symposium. What a coincidence.

Anna Stupnytska, Global Economist at Fidelity International: Fed plays down Delta concerns

Markets expected the Fed to deliver a dovish message as concerns over global growth driven by the spread of the Delta variant have intensified over the past few weeks. However, contrary to these expectations, the statement was somewhat hawkish as it did not feature the Delta variant risks explicitly, although Chairman Powell referred to it in the press conference.

Moreover, with respect to ‘substantial further progress’ in the labour market required for tapering, the statement acknowledged ‘the economy has made progress toward these goals’. In the press conference, however, Powell noted they are still ‘some ways away’ and have ‘some ground to cover’ on the labour market progress, sending a slightly more dovish message relative to the statement.

The growing risks around the outlook since the last meeting, as well as concerns about potential spillovers from China market weakness driven by regulatory actions, have evidently not been sufficient for the Fed to ‘blink’ and postpone tapering discussions and the ultimate announcement in coming months. Indeed, US financial conditions have actually eased further since the June meeting, now at the easiest levels not seen for decades. At the same time, market-based inflation expectations have been stable over the past few weeks. This must have encouraged the FOMC members to press ahead with tapering planning and delivering first hints about the timeline in coming meetings.

But, even as the talk about tapering kicks off, we believe the Fed will be cautious and measured in scaling back monetary stimulus, facing an extremely delicate balance between providing just enough accommodation to sustain easy financial conditions and manage the higher debt burden and, at the same time, keeping inflation and financial stability risks in check.

Paolo Zanghieri, Senior Economist at Generali Investments

In a rather uneventful meeting, the Fed presented again its view of a strengthening economy with only temporary pressures on inflation. The press release duly noticed that the progress of the economy is incomplete, but also signalled that the appropriate moment to withdraw support is getting closer.

As in the past meetings, chair Powell noted that the “substantial further progress” in the labour market the Fed needs to see before reducing stimulus has not been met yet. The large disconnect between high unemployment and booming job posting is due to  the fact that a substantial share of unemployed is getting a new job rather than going back to the old one, and this creates speed limits to job creation.

Moreover, bottlenecks related to residual COVID scare, childcare and generous employment benefit are fading The FOMC expects a strong recovery of the labour market over the coming months, but there is still some ground to cover. Our indicator, which seeks to consider the aggregate behaviour of the labour market and the performance differentials across groups, shows a still substantial gap with respect to the pre-pandemic situation.

The Fed is not afraid of the rapid increase in wages. Unit labour costs are under control, reducing the risk of a wage-price spiral.

The progress the whole economy has made has been noted, as well as the temporary bottlenecks constraining supply in the automotive and other industries. The Fed does not seem concerned by the signs of deceleration in activity flagged by a few indicators (see table at the bottom) nor by the risks related to the spreading of the Delta variant. Chair Powell noted that each strain of infection has been progressively less harmful to the economy, and expects the same to happen with the Delta variant.

The view on inflation remains unchanged. The current spike is due to transitory factors limited to few sectors, heavily affected by the reopening of the economy, and base effects that are already receding. Inflation is mostly caused by supply temporarily failing to catch up with demand, something the Fed will not respond too. Yet, chair Powell admitted that timing the normalisation of inflation is very hard. Risks remain tilted to the upside, at least in the short term. Any discussion on whether average inflation has reached the target is up to the FOMC, chair Powell stressed. But this is relevant only for the first rise in rates, which is not in the Fed’s radar screen.

Both financial markets and households are indeed getting more confident in the temporary nature of the bout, revising down long-term expectations. The inflation expectations gauge introduced by the Fed rose in Q2 back to the 2014 levels (just below 2.1%). Our nowcast for Q3 points to a further, but much smaller, increase.

As the economy evolves according to expectations, the appropriate time for tapering approaches. Powell admitted that the discussion on how to reduce purchases is ongoing, and FOMC members will strive to be as transparent as possible, providing advance notice of any move. The option of tapering MBS faster than Treasury in order to rein in price increase finds little support within the committee but is being discussed. We stick to the view of tapering beginning in January, with some preliminary announcement at the forthcoming Jackson Hole conference (Aug. 26- 28)

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First reactions to yesterday’s FED meeting