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FOMC preview: will sleepy markets be given a Fed wake-up call?

15 June 2021

Since March 2020 the Federal Reserve has been about as accommodative as they could possibly be. On Wednesday at 19:00 BST (Thursday 04:00 AEST), Chair Jay Powell is set to deliver a press conference after the FOMC meeting. However, as the US (and global economy) heals, so too does the need to slowly normalise policy. 

Betting against a dovish Fed is always hard, especially when millions of Americans who lost jobs through the pandemic are still without work. However, given current expectations and a market short of USD’s, could the FOMC meeting indeed prove to be a volatility event for traders?

Key focal points and possible market reaction 

While there's much the market could focus on, here's five core factors that the market will be most sensitive to: 

With the market obsessed with the timeline for reducing (tapering) the pace of its asset purchase program (QE) from its current rate of $120b pm bond-buying (QE) program – how the Fed see the evolution of tapering will be a key focus for market participants. 

Dots to show a hike in 2023. In March we saw 7 (of 18 Fed voting members) voting for a hike in 2023. Can we see another two members switching calls to pencil in a hike in 2023, resulting in the median projection moving to a hike? 

2022 core PCE inflation revisions? We should see a sizeable revision to their 2021 projection of core PCE (personal consumption expenditures) from 2.2% to 2.8% (perhaps even +3%). However, more importantly will be whether estimates for 2022 core PCE is revised higher or lower from 2% and to what extent? 

It’s all about the labour market. Given the US labour market is the Fed’s priority when setting policy, employment trends will be discussed at length in Jay Powell’s press conference – subsequently, any changes to the Fed’s forecasts for the 2021 or 2022 unemployment rate could move markets. The current forecast stands at 4.5% and 3.9% respectively. 

A hike in short-term rates? Will there be a technical 5 basis point (bp) adjustment higher to IORB (Interest on reserve balances) and the overnight RRP rate (reverse repo program)? A complicated consideration, but these guide short-term US interest rates which, in tuns, has a dramatic effect on the USD. 

What’s the trade?

With the market running a short USD position and leveraged funds having pared back shorts in US Treasuries it feels like the risk at the FOMC is slightly skewed to a stronger USD, which could weigh on Tech and Gold. Betting that the Fed will be hawkish (relative to expectations) is always tough, so the preference is to wait for price to push the trade. Here's a few levels I like:



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