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FOMC: QT Taper Not Assured, Powell Defense Of Easing Bias Eyed

FED

Some key aspects to watch in today's FOMC decision and press conference:

  • Statement: MNI doesn't expect any major changes to the statement, including in the requirement in the forward guidance for “greater confidence” on inflation before cutting. It's possible the Fed changes "Inflation has eased over the past year but remains elevated" in a more hawkish direction.
  • QT Taper: In terms of a potential surprise upon the decision release, while we agree it is likely that the Fed announces a QT taper, there is probably a better chance it doesn't than the (now overwhelming) consensus expects. The data/market indicators/FOMC members don't seem to suggest much urgency and waiting another month would be entirely justifiable.
  • Press Conference: We anticipate Powell will effectively confirm that the recent data mean easing as soon as June is a doubtful prospect unless major surprises emerge. However, overall, the FOMC’s bias toward easing later this year is set to remain.
  • It would be hard for Powell to categorically rule out possible hikes in future, though it could generate a market-moving headline given how at odds this would be to the formal forward guidance that is explicitly pointing to the next move being a cut.
  • More likely, Powell will affirm that the Committee’s base case is that the disinflationary progress they had anticipated is delayed, but not (yet) denied. Powell’s view appears to be that policy is sufficiently restrictive, and “well positioned to handle the risks we face … we can maintain the current level of restriction for as long as needed”. This is a higher-for longer view, not a reconsideration of the easing bias, and we would expect it would take at least a couple more upside inflation surprises to force a serious reconsideration.
  • We will be paying attention to how Powell characterizes the evolution of the FOMC’s perspective since March, however. This includes that meeting’s sudden emphasis on “unexpected” labor market weakness as a possible reason to cut rates, Powell’s affirmation that the Committee saw policy as restrictive and was being felt through the economy, and of course, whether the 3 cuts in March's Dot Plot are still the core scenario.
  • It will also be interesting if the FOMC sees threats to the soft landing thesis that has been adopted in the past couple of quarterly economic projections – are there concerns that the labor market and activity need to weaken more than currently expected in order to get inflation back to target? The FOMC probably remains cautiously optimistic that it won’t come to that, but less so than a month ago.
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Some key aspects to watch in today's FOMC decision and press conference:

  • Statement: MNI doesn't expect any major changes to the statement, including in the requirement in the forward guidance for “greater confidence” on inflation before cutting. It's possible the Fed changes "Inflation has eased over the past year but remains elevated" in a more hawkish direction.
  • QT Taper: In terms of a potential surprise upon the decision release, while we agree it is likely that the Fed announces a QT taper, there is probably a better chance it doesn't than the (now overwhelming) consensus expects. The data/market indicators/FOMC members don't seem to suggest much urgency and waiting another month would be entirely justifiable.
  • Press Conference: We anticipate Powell will effectively confirm that the recent data mean easing as soon as June is a doubtful prospect unless major surprises emerge. However, overall, the FOMC’s bias toward easing later this year is set to remain.
  • It would be hard for Powell to categorically rule out possible hikes in future, though it could generate a market-moving headline given how at odds this would be to the formal forward guidance that is explicitly pointing to the next move being a cut.
  • More likely, Powell will affirm that the Committee’s base case is that the disinflationary progress they had anticipated is delayed, but not (yet) denied. Powell’s view appears to be that policy is sufficiently restrictive, and “well positioned to handle the risks we face … we can maintain the current level of restriction for as long as needed”. This is a higher-for longer view, not a reconsideration of the easing bias, and we would expect it would take at least a couple more upside inflation surprises to force a serious reconsideration.
  • We will be paying attention to how Powell characterizes the evolution of the FOMC’s perspective since March, however. This includes that meeting’s sudden emphasis on “unexpected” labor market weakness as a possible reason to cut rates, Powell’s affirmation that the Committee saw policy as restrictive and was being felt through the economy, and of course, whether the 3 cuts in March's Dot Plot are still the core scenario.
  • It will also be interesting if the FOMC sees threats to the soft landing thesis that has been adopted in the past couple of quarterly economic projections – are there concerns that the labor market and activity need to weaken more than currently expected in order to get inflation back to target? The FOMC probably remains cautiously optimistic that it won’t come to that, but less so than a month ago.