FOMC will be concluded today. The markets don’t expect any rate or QE change. Despite that, today’s meeting will be one of the most important ones this year. Here are some of the key subjects of the meeting and the press conference.
- Maybe the most important subject of today’s meeting will be: is it time to start talking about reducing the asset purchases. FED is expecting substantial further progress in the labor market and an average of %2 inflation. CPI reached %5 and Core PCE reached over %3 so that box is almost checked. Total nonfarm payrolls however still around 8 million less than before Covid levels. The weaker jobs market is supporting the FED’s hand but probably not for long. FED, most probably repeats the “it is too early to talk about talking reducing asset purchases” rhetoric but they may give some hints about when it is okay to start talking.
CPI reached %5, core CPI is %3,8 and core PCE is over %3 while FED’s 2021 forecast is %2,2. FED is saying that inflation is transitory but surging PPI and core inflation numbers are saying otherwise. The question will be how much of the inflation is transitory. Today, Powell probably repeats himself and says “transitory” again. But at the press conference, he may have to answer how much does FED thinks is transitory and how much is it will here to stay.
Another key subject will be the jobs market. Nonfarm payroll change data is getting negative surprises for some time. At the same time JOLTS open positions data beat ATH two months in a row and currently showing more than 9 million open job positions. Biden’s fiscal stimulus package contained weekly checks for the unemployed, due to the end of September is one of the key reasons behind the reluctant job seekers. Another reason is low, pre-covid level wages. If hourly wages increase to attract the workforce, inflationary pressure may rise in the short term. As the September deadline approaches, reluctance to seeking jobs will reduce too, and may cause huge payroll data over a few months. Powell’s comments about the jobs market will be important today.
- FED, most probably increase the GDP, inflation and reduce the unemployment forecast. The markets mostly expect the famous “dot plot” to change as well to a 2023 rate increase. Currently, PCE and core PCE forecast show %2 or more inflation for the short and long term. How much increase it will get may hint how much inflation is expected to be transitory by the FED.
- Another point is the repo and short-term bill markets. Currently, more than $4 trillion is cumulated in the money markets and short-term rates flirting with the negative territory. It is still unclear that FED will tweak money markets or not. Further increase of the cash in the money market may cause unwanted problems if remain unchecked.
