Fed to re-emphasize current strategy while raising economic forecasts

Fed to re-emphasize current strategy while raising economic forecasts

At its FOMC meeting this week, the Fed is expected to maintain its current policies of zero interest rates and sizable purchases of Treasuries and MBS, and re-emphasize the importance of sustaining such monetary accommodation to support the recovery in the economy and labor markets. The Fed will update its quarterly Summary of Economic Projections (SEPs), we expect it will significantly increase its projection of GDP growth and projecting that a rise in the Federal funds rate would be appropriate in 2023. In the press conference, Fed Chair Powell is likely to say that while the economy is recovering, employment and labor markets lag well behind. Regarding financial markets, we expect he will note that inflation remains tame and the recent backup in rates suggests that the Fed’s policies are on the right track.

In summary:

*In its Policy Statement, the Fed is expected note that economic conditions are improving and maintain its stance that its current policies are necessary to support the recovery. The statement iss unlikely to indicate that the Fed intends to modify its net new $80 billion per month purchases of Treasuries and $40 billion of MBS anytime soon.

*In its SEPs, the Fed is expected to significantly raise its forecast of real GDP growth for Q4/Q4 2021 from 4.2%, its December forecast to reflect the stronger economic activity and incorporate recent fiscal stimulus legislation. The median FOMC projection may be 5.5%-6%. The Fed likely will maintain its December forecasts of the unemployment rate of 5.0% at year-end 2021 and 4.2% at year-end 2022, based on the assumption that unemployment falls but labor force participation rates rise.

*The Fed likely will tweak up its projections of the core PCE inflation by a tenth each in 2021 and 2022, to 1.9% and 2.0%, and raise its headline inflation projections for 2021 to reflect higher oil/energy prices.

*The Fed is expected to project that it is appropriate to raise its Federal funds rate target in 2023. In the December SEPs, the median Fed member had forecast that it would be appropriate to keep the policy rate unchanged at zero through 2023, although five FOMC members has indicated that one rate hike in 2023 would be appropriate. Currently, the futures markets predict two rate hikes of 25 basis points in 2023. The ever-dovish and cautious Fed is unlikely to go that far, although the “dot plots” may indicate that several FOMC members think several rate hikes would be appropriate, and one or more may indicate that a rate increase in 2022 may be appropriate.

*While markets focus on the rise in bond yields and some participants are concerned about inflation risks, in his post-FOMC meeting press conference, Powell is expected to note that the rise in market-based expectations of inflation and bond yields confirm that the Fed’s ultra-easy monetary policy is working. He will likely repeat the Fed’s new strategic framework that the Fed favors higher inflation.

Mickey Levy, mickey-levy@berenberg-us.com

Member FINRA & SIPC
This email and any files or attachments transmitted with it may contain confidential or privileged information and are intended solely for the use of the intended recipient. If you are not the intended recipient, please do not copy, retain, disclose or use any part of the message or its attachments. Please notify the sender immediately by return email and destroy or delete any copies. Dissemination or use of this information by anyone other than the intended recipient is unauthorized and may be illegal. Communications by email cannot be guaranteed to be secure or error-free. Emails and their attachments are subject to being intercepted, becoming corrupted, getting lost or delayed, or may contain viruses. Therefore, neither the sender nor Berenberg Capital Markets LLC (BCM) accepts any liability for any errors or omissions in the content of this message or problems in its transmission, including those arising as a result of its transmission over the internet.
BCM does not assume liability for the correctness and completeness of all information given and/or attachments contained herein. The provided information has not been checked by a third party, especially an independent auditing firm. BCM explicitly points to the stated date of preparation. The information given can become incorrect due to passage of time and/or as a result of legal, political, economic or other changes. BCM does not assume responsibility to indicate such changes and/or to publish an updated document. Any document(s) or attachment(s) is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers.
In light of upcoming regulatory changes, please be informed that BCM will continue to share information with you until unsubscribe@berenberg-us.com receives your termination/deletion request. For more information about the General Data Protection Regulation (GDPR) and our privacy policies please refer to https://www.berenberg-us.com/legal-notice. BCM reserves all the rights in this communication. No part of this communication or its content may be rewritten, copied, photocopied or duplicated in any form by any means or redistributed without BCM’s prior written consent.
The information contained herein and sourced may have been adopted from various news sources, for example, Bloomberg, Reuters, Street Account and various other sources. BCM does not claim accuracy, completeness, timeliness, suitability, or otherwise regarding all the information on the securities, stock markets, or developments referred to within. On no account should the Content be regarded as a substitute for the recipient procuring information for himself/herself or exercising his/her own judgments. BCM is not responsible for any recipient(s) use of this information. This Content is not a solicitation or an offer to buy or sell any of the securities contained herein. This information does not constitute a recommendation or take into account the particular investment objectives, financial situations, or needs of clients. Clients should consider whether any advice or recommendation in this Content is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of securities which may be referred to in this Content and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain securities.