Hawkish Risks Into Today’s Fed Meeting – How Can the Fed Surprise?

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on Jun 16, 2021
Updated: Dec 19, 2022
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The Federal Reserve interest rate decision is due several hours from now, and few market participants expect the Fed to deliver a hawkish statement. Here is how the Fed might surprise.

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The big Fed meeting day is upon us, and if there is one economic event a currency trader should focus on at the end of the second quarter, this is it. It is an event because the overall message, and not only one statement, need to be considered.

Later in the trading day, the Fed delivers the FOMC statement, then the Staff Projections, followed by the dot plot – in that order. There is a thirty-minute interval between the FOMC statement release and the press conference in which the staff projections and the dot plot are made public, so the Fed must be very careful what to introduce in the FOMC statement so as not to trigger unwarranted volatility.

Will the Fed Surprise Markets?

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The consensus is that the Fed will say that it did not discuss the tapering of its asset purchases at this meeting, and that it will choose to announce a possible tapering at the upcoming Jackson Hole Symposium in August.

However, one cannot escape the feeling that the markets are underpricing the hawkish risks into the Fed meeting. There are a few reasons to consider possible hawkish risks.

Firstly, stocks are at all-time highs, as are home prices. Secondly, core inflation has hit its highest level since 1992. At the same time, junk-bond yields are at an all-time low and job openings at an all-time high. Why the need for 0% rates and more bond-buying from the Fed?

Therefore, the Fed does have arguments for removing some of the accommodative measures. It may decide to hike the interest rate on excess reserves (IOER). It may also signal a rate hike as soon as 2023, in the dot plot to be released during today’s press conference. Finally, Fed’s Chair Jerome Powell may be forced to quantify how the Fed sees the moderate overshooting of inflation.

Any movements along these lines risk taking markets by surprise. Is it too soon for the Fed to remove the accommodative measures?

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