The first meeting of the Federal Open Market Committee of the new year brings its own set of expectations and expectations. While no FOMC action on monetary policy is expected, markets are monitoring how the Federal Reserve is partnering with the Biden administration and how it is responding to the 10-year Treasury yield falling from 0.52% on August 4 at 1.15% on January 14. This increases the risks that an inadvertent or misunderstood commentary on interest rates, inflation, declining bond purchases and Fed independence could trigger a liquidation in financial markets.
At the last FOMC meeting on December 15-16, 2020, the panel made no changes to its current bond buying and interest rate policies. Since then, Congress has passed a $ 900 billion fiscal stimulus package offering additional unemployment benefits, small business assistance, and $ 600 checks to most Americans. On January 14, President-elect Biden offered to increase unemployment checks and benefits as well as other support measures.
The COVID-19 vaccine rollout and fiscal efforts complement the Fed’s support for economic and employment recovery and give the FOMC more time to assess its next steps. Pending efforts to increase individual payments from $ 600 to $ 2,000 and speed up COVID-19 vaccinations, coinciding with declining retail sales from October to December and rising unemployment will lower expectations of any initiative from the government. FOMC at its next meeting.
What will be different when the FOMC meets on January 26-27 is to note:
- Treasury Secretary-designate Janet Yellen could seek Fed support for Biden-Harris economic recovery initiatives that are helping disadvantaged working groups, especially amid growing concern that the FOMC’s economic recovery efforts have fostered Wall Street versus the low-income and minority workforce, with increasing income and wealth disparities.
- Changes in voting members of the FOMC, with Governor Christopher Waller and Fed Chairmen of Atlanta, San Francisco, Richmond and Chicago becoming voting members – and three of them (Waller, Atlanta President Raphael Bostic and Mary Daly of San Francisco) speaking out on the need to accelerate the recovery of jobs and wages for disadvantaged workers.
The yield on 10-year Treasuries had already risen to 0.92% at the last Fed meeting on, and the FOMC decided not to initiate yield curve control or targeting of the yield curve. yield, which would be a big policy change and which would be difficult. reverse. If the Treasury yield curve continues to steepen, as since mid-December, it becomes a threat to financial stability and a constraint on deficit financing. So if the 10-year Treasury rises more significantly and the Fed’s bond purchases don’t contain it, then the FOMC may feel pressured to announce a specific target.
As the economy continues to recover, energy and food prices will also rise, as they did in December. If core inflation remained unchanged at 1.6% on an annual basis that month, it could easily reach 3% in the second quarter, given the decline in energy prices in the second quarter of 2020. So As the recovery accelerates in the second half of 2021, inflation is likely to surprise on the upside and test the FOMC’s commitment to let the economy warm up for some time as job growth spreads out more evenly. The fact that this outlook reaches the level requiring comment after the next FOMC meeting will indicate its concern and increase the opportunity for a misunderstanding on the Fed’s timetable for containing inflation.
As Congressional and White House leaders orient themselves more and more in their public comments on economic and social policies, there will be more criticism that the Fed’s policies favor Wall Street instead. than Main Street. New political leaders often “look for someone to blame” for the conditions they inherit, so there will be pressures to rethink Main Street and corporate credit facilities.
Fed Governor Lael Brainard and Atlanta Fed Chairman Bostic hoping to replace Fed Chairman Jerome Powell when his term expires in February 2022, their interest in supporting job and wage growth of the low-income labor force will likely appear in the notes and minutes of the FOMC meeting. Likewise, the concerns of other Fed chairmen about the Fed’s policies contributing to rising income inequality will also be a topic of conversation and, ultimately, a catalyst for change.
Although several federal bank presidents have suggested that the phased reduction in bond purchases could begin later in 2021, Powell in a speech in Princeton on Jan. 14 said now was not the time to talk about it. Governors Clarida and Brainard echoed this sentiment. The way it is reported and reflected on FOMC policy actions will create opportunities for markets to react badly. Overall, the Fed’s support for the new administration’s economic recovery policies and the high regard for Yellen could change the course of future FOMC meetings this year.