- FOMC not expected to announce QE tapering but may begin preliminary talks
- White House gives bipartisan infrastructure negotiations only 7-10 days
- U.S. housing startsÂ
FOMC not expected to announce QE tapering but may begin preliminary talks — The 2-day FOMC meeting concludes today. Fed Chair Powell will give his usual post-meeting press conference and the Fed will release updated macroeconomic forecasts and a new Fed dot-plot forecast for the funds rate.
Today’s new FOMC dot-plot is likely to be more hawkish than the last dot-plot, which was released on March 17 when Covid infection levels were much higher, and vaccinations were much lower. At his March 17 press conference, Fed Chair Powell stressed the dovish nature of the dot-plot by saying, “The strong bulk of the committee is not showing a rate increase during the forecast period” through 2023.
However, the April dot-plot showed that there were 4 FOMC members who are expecting a rate hike in 2022, up from one member in the previous dot-plot in December. For 2023, there were 7 members predicting higher rates, up from 5 members in the December dot-plot forecast. Moreover, 2 of those 7 members were very hawkish for 2023 and were predicting a +100 bp rate hike, while 3 of the members expect a +75 bp rate hike.
The markets today will be keying mainly on whether the FOMC takes a step forward in its consideration of QE tapering. Fed officials in the past several weeks have been vocal about the Fed’s plan to soon begin discussing when to announce QE tapering.
Those talks may well begin today, although Fed Chair Powell is likely to stress that QE tapering is not imminent. The Fed would undoubtedly like to stave off any taper tantrum for at least another month or two until the economic expansion is more firmly entrenched and the economy has recovered more of the 7.6 million missing jobs.
At the last FOMC meeting on April 28-29, Fed Chair Powell said “it is not time yet” to start talking about tapering asset purchases. However, the minutes from that meeting, later released on May 19, said that “a number” of FOMC members suggested that discussions might have to begin at some point on QE tapering.
Even if preliminary QE tapering discussions begin this week, the markets generally do not expect an early warning of QE tapering until the Fed’s August Jackson Hole conference or the September 21-22 FOMC meeting, and a formal announcement sometime between September and December.
A survey taken by Bloomberg in early June found that only 16% of respondents expect the Fed’s early-warning to take place in June or July. The largest plurality of 40% believe that the Fed’s early-warning will come at the Fed’s Jackson Hole Conference in August. The second-highest percentage of 24% believe the early warning will come in September. Only 14% of respondents expect the early warning to come in October or later. Regarding the formal QE tapering announcement, 33% of the respondents expect the announcement in September, 10% in October or November, and 33% in December.
Aside from QE tapering, the markets are waiting to see whether the FOMC this week boosts its short-term administered rates to put a higher floor under short-term rates. The overnight federal funds rate has been trading at 0.06%, which is 6.5 bp below the midpoint of 0.125% of the Fed’s 0.00%/0.25% target range.
The recent Bloomberg survey found that 71% of respondents expect the FOMC at its meeting this week to leave its interest on excess reserves rate (IOER) unchanged. However, 29% of the respondents are expecting the FOMC this week to raise the IOER rate by +5 bp to 0.15%. The markets are still not expecting the Fed’s first +25 bp hike in the federal funds rate until early 2023.
White House gives bipartisan infrastructure negotiations only 7-10 days — White House officials yesterday in a meeting with House Democrats said it should be clear within 7-10 days whether the bipartisan talks on an infrastructure bill will be successful. The White House said that was not a deadline but simply an observation. House Speaker Pelosi, however, is likely to take that 7-10 day timeline to be a green light to pass a Democratic version of the infrastructure bill in the House, which she has said she would like to do by the Fourth of July.
The infrastructure proposal by the bipartisan group of ten Senators contains only $579 billion of new spending, far below President Biden’s last offer of $1.7 trillion. The bipartisan bill is also very thin on pay-fors, relying on modifications of the gas tax and repurposing pandemic money.
The five Republican members of the bipartisan infrastructure group were due to pitch the proposal to the full Republican caucus later Tuesday. The markets by today should therefore have a little better idea of whether the proposal has any hope of gaining the support of the 10 Republican Senators that would be necessary to overcome a filibuster, assuming that all Democratic Senators would support the package. There have been protests from several Democratic Senators to the bipartisan infrastructure package, who fear it might supplant the plans of Democrats to pass a much broader jobs and family plan. The chances of a bipartisan infrastructure bill remain very thin.
U.S. housing starts — The consensus is for today’s May housing starts report to show a +3.9% m/m increase to 1.630 million, recovering part of April’s -9.5% m/m decline to 1.569 million. Housing starts remain strong but have run into some obstacles from high lumber prices, and some resistance to the high price of new homes in general.
