- This was a placeholder meeting with slightly upgraded language
- 2s10s bull flattened, but no taper talk should not have surprised
Well, apparently someone was surprised to hear Powell say that the FOMC did not talk about tapering at this meeting! When they heard that comment in the press conference, it drove a mild rally in US 10s and slightly firmer stocks. That was a more dominant market effect than resulted from the mildly upgraded language in the statement that itself would have surprised few. As expected, there were no policy changes at this meeting including no change to the IOER de facto policy rate.
Market reactions
The US 10 year yield fell by about 3–4bps after the full suite of communications with the 2 year about ~1bp lower and so 2s10s flattened. The USD was slightly firmer by about ¼% on a DXY basis. The S&P 500 edged very slightly higher (0.1%). In all, Powell would consider it job well done as he didn't bomb the market ahead of President Biden’s speech tonight.
Statement changes
All of the modest statement changes were concentrated in the second and third paragraphs as noted in the accompanying statement comparison (next page). In general, the changes sound a bit more positive in nature and of the common sense variety.
Press conference
The first question during the press conference was about whether the FOMC felt it was time to ‘start talking about talking about tapering’ and Powell simply said “no, we’ve said we would talk well in advance and it is not yet time to do so. We still need substantial further progress which will take some time to achieve.” No surprise there!
Powell was also asked whether herd immunity or confidence that the pandemic would not resurface would be required before normalizing policy. He was asked if they would require the CDC to wave the all-clear sign or the WHO to downgrade pandemic warnings. Powell indicated that while the virus is controlling the economy, they stick to the criteria that substantial further progress on the dual mandate is required but it’s likely that would co-exist with improved virus control but not necessarily requiring that the virus be fully under control.
The last question worth flagging is that Powell was asked what would happen if inflation expectations moved up before returning to full employment? How would you react? He said that it seems unlikely that would occur and that it seems more likely if the Fed saw full employment that they would see actual inflation moving up to target. Powell noted that persistent inflation would take some time and would require very strong labour markets, but that their long-run statement indicates that when the two measures conflict there are other factors they would consider but without saying how.
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