Today we will know the results of the two-day Fed meeting. It seems to be crucial for the markets due to the earlier strong increase in US debt yields and rapid growth of inflation expectations, to which Fed representatives did not react in their statements.
The market consensus assumes that the Federal Reserve will leave monetary policy unchanged when it concludes its two-day meeting today, and more attention will be paid to new macroeconomic projections. It appears, as the OECD projections showed, that the outlook for the U.S. economy has improved from January, as coronavirus infections have declined, vaccination activity has accelerated, and a $1.9 trillion stimulus package has been signed into law, pushing up inflation expectations and a bond sell-off. If inflation exceeds the 2 percent target for an extended period of time and if the so-called dot plot (the Fed's projections of future interest rate levels) continues to point to record-low rates until at least 2023, policymakers may consider tightening monetary policy sooner. Also in focus will be a press conference where Jerome Powell, Fed chief, is expected to provide more information on the bank's views and actions to counter the recent rise in Treasury bond yields.
Investors seem to be discussing several ideas, including resuming Operation Twist or changing the current asset purchase program and shifting MBS purchases from 40 billion to 20 billion and increasing the scale of Treasury bond purchases from $80 billion to $100 billion. If the Fed does anything to stop the rise in yields, or at least start to worry about it, it could be a positive development for the stock market, but also for gold, which has undergone a significant correction since the summer of 2020. It could be at the same time a factor influencing its depreciation against the dollar, especially against JPY or CHF.
The Fed's continued stance that rising yields are not a bad thing and that inflation will not rise significantly could lead to more strength for the USD in the broad market, but it could also lead to more nervousness in the US equity market or the gold market. Today, many markets may depend on the Fed decision, which will be announced at 7:00 pm Polish time, and at 7:30 pm Jerome Powell's press conference will begin.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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