Monex: Fed will give little direction and mainly want to gain time

Monex: Fed will give little direction and mainly want to gain time

27 juli 2021

Fed
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This is a commentary by Ima Sammani, FX Market Specialist at Monex Europe, on this week's Fed meeting.

Caught between June’s meeting where the dot plot became substantially more hawkish and August’s Jackson Hole symposium, Wednesday’s FOMC meeting was always set to be a placeholder event. 

Given the restrictions to the labour market recovery, it is too early for the Fed to provide any additional forward guidance on policy normalisation, while the overall economic recovery remains in question as health concerns reappear upon widespread reopening. Both of these dynamics give the Fed plenty of reason to play for time at this week’s meeting. 

Despite the lack of policy alterations expected, market developments over the past fortnight have brought the meeting back into focus for investors. Chair Powell’s interpretation of recent price action in equity and bond markets will be key, especially as markets buy into the Fed’s transitory narrative with market-based inflation expectations driving back towards 2%. On top of that, concerns that policy normalisation will occur too early under the markets latest assessment of the global recovery have begun to weigh on intermediate yields. 

With a lot of uncertainty remaining over the future of US monetary policy and the global economic recovery, price action in the US Treasuries has been indecisive on an intraday basis, although a flattening of the yield curve is visible over a longer time frame. Markets will therefore be looking for direction from Chair Powell at this week’s meeting and take cues from the reaction in US Treasuries.

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