(US CPI and Total Nonfarm Payrolls)
The markets don’t expect any big changes from the FOMC meeting today but a possible composition of how to taper discussions will be followed. Total nonfarm payrolls are still more than 6.5 million short of pre-pandemic levels. Despite the highest CPI since the 2008 crisis and the highest Core CPI since the 90s, most of the FED board members still think inflation is transitory. But how much of the inflation is transitory is unclear. FED’s latest forecasts show members predict PCE and core PCE to remain above the FED target, %2 over the course of the forecast horizon. Powell’s statements about the inflation in the press conference will be important.
Another discussion about rising prices includes housing prices. Yesterday, S&P CoreLogic real estate price index showed a %16.61 increase YoY. Economists are conflicted about the FED’s $40 billion mortgage back security purchases are fueling some of the price increase or not. This divergence is present in the board members as well. If members discuss the possible tapering’s composition, a decision about a faster decrease of mortgage back securities will be followed by the markets.
(US Daily Covid-19 Cases and 10-Year Bond Rate)
FED, may want to stay dovish because of the lagging recovery at the jobs market but another reason to stay dovish is the delta variant. As the delta variant becomes the dominant variant, cases start to rise. 7-day average of new cases rises to 61,298. Yesterday, IMF increase the US growth forecast but fears of possible lockdowns rising for some states and worse than expected growth for 2021 are starting to show themselves. 10-year rate fell from %1.57 to %1.24 since the last FOMC.
In summary, the markets will watch FED’s tapering discussions, transitory inflation and delta variant statements, and job market outlook. If FED stays dovish as expected, the dollar index may pause the recent uptrend.