J.P.Morgan Balanced Risks Around FOMC

Ahead of the final FOMC decision of 2020 J.P.Morgan note that "over the intermeeting period, intermediate to long-end Treasury yields have risen modestly and market-based inflation expectations have risen by 16bp, trading near their highest levels of the last two years. This week's meeting will likely focus on the Fed's asset purchase program. Based on the minutes from the November meeting, we think the Committee will adopt qualitative outcome-based guidance on the horizon over which they expect to continue purchasing bonds, which will likely refer to the course of the virus. We also think the Fed will also indicate that it will extend the average maturity of its purchases, though we acknowledge this outcome is a close call. The market does not seem to be priced for the Fed to extend the WAM of its purchases, indicating risks of lower yields if this policy change is announced. However, given that the market broadly projects asset purchases continuing apace until late 2021 at the earliest, any disappointment in qualitative guidance would likely result in higher yields. These two factors cancel each other out in our view, presenting balanced risks for yields around the FOMC meeting on Wednesday."