The Fed met this week and tapered as expected to the tune of $15 billion per month. The slight shift was that the Fed was going to be ‘flexible’ around the timing for the end of asset purchases. This was a nod to the rising inflation pressures seen around the world and the Fed assuring markets it would act if necessary to curb rising inflation. However, in the press conference, the Fed stressed that they would be ‘patient’ before hiking rates.
The key points
The Fed gave a further nod to inflation concerns by 1) changing the statement to read that inflation was ‘expected’ to be transitory & 2) that Jerome Powell did not mention the word ‘transitory’ in the press conference.
Jerome Powell dodged the question ‘is a 2022 hike appropriate as you would expect, however, he did recognise that maximum employment could be reached by the middle of next year. So, that is possibly more hawkish.
Jerome Powell does not think that the Fed is behind the curve, needs to see more progress on jobs. He considers jobs back to ‘pre-Delta’ path as ‘good progress’.
The Fed took a step back from transitory in the statement as it means ‘different things to different people’. Now I think the meaning is fairly clear, so this can only really be about time frames. A 2-year blip may be considered transitory over a 25-year sample etc.
The Fed wants the market to know that the Fed ‘have the tools’ to combat high inflation if it becomes permanent.
Similar to the RBA the Fed has been hawkish indeed, and dovish in action. They have been hawkish by tapering flexibly and communicating that the Fed will communicate to markets if they have to alter the pace of tapering. However, with a dovish stance of ‘patience’ on hiking rates. It is arguable that the Fed has kept open the opportunity to hike rates in the middle of June 2022. However, like with the RBA, two important metrics going forward for the Fed are going to be inflation and employment. The Fed has stressed patience on both jobs and inflation for now. However, significant moves in either of these two metrics will result in the Fed thinking again. Be prepared.
The sharp move lower in bond yields posts the FOMC as markets price out aggressive rate hikes means gold could find some decent upside, so worth looking out for.