Today’s FOMC decision will be a lot more impactful to markets relative to previous ones. Fiscal stimulus packages increase the risk of higher inflation and higher bond rates which brings the question, when will the FED start to taper? Here are some of the key points to watch at today’s FOMC meeting:
- FED won’t change the rates or asset-purchasing programs and probably repeat the standard speech of “FED will support the economy until full employment and over %2 inflation target reached.”. Powell may say that the upside risk of inflation still low.
- FED’s %4.2 GDP, %5 unemployment, and %1.8 inflation projections are outdated with the new stimulus packages. FED most probably change the GDP forecast to at least OECD level, %6.5. With the growth update, will come to the lower unemployment decrease and inflation increase. 2021 and 2022 inflation forecast is currently at %1.8 and %1.9, near the %2 targets. With the new GDP upgrade, these levels probably will be at least %2 and that means FED will reach its target in late 2021 or early 2022.
- How will the economic forecast affect the famous FOMC dot plot will be one go-to point of this meeting. At the current look, most of the members expect rates to go up after 2023. But this may be lowered to 2023 or earlier.
- One of the overlooked points for this meeting will be the decision or hints about SLR. Currently, government bonds and deposits are exempt from the SLR calculation. This is giving banks to option to buy more bonds. The exemption period will end at the end of this month and FED did not give any hint about an extension. But, the markets expect an extension of the exemption. If FED won’t give any hints about an extension a new bond sell-off wave may come in the incoming days. Or with a new extension period throughout the year, bearish pressures of the bond may decrease.