The attention of stock market investors will be focused on the results of the FRS meeting on March 16-17. The central bank is likely to raise forecasts for US economic growth, but reiterate its promise not to raise interest rates in the coming years.
The Federal Open Market Committee (FOMC) Fed meeting will be held this Tuesday and Wednesday March 16-17, which is a key event for the US stock market this week.
Fed Chairman Jerome Powell has a difficult task to convince financial markets that inflationary risks can be overlooked and that rate hikes will remain for years to come.
Earlier, the US central bank said that based on the current downturn in the labor market, the Fed is changing its approach to adjusting inflation, in contrast to its strategy before the pandemic, since inflation has historically been below the target of 2%.
Powell said the Fed would allow inflation to rise above 2% until it achieves full employment, a goal the country had been pursuing for years before the pandemic. At the same time, Powell argued that the rise in inflation would be short-lived.
The Fed chart below shows the change in core inflation PCE since 2010, which has been below the Fed’s 2% target for most of the past decade.
The inflation rate PCE is used by the FRS as a key indicator in making forecasts, it does not take into account the change in volatile prices for food and energy, which, as a rule, fluctuate greatly from month to month from season to season.
What will change for investors?
The last time the Fed made forecasts was before the adoption of the US $ 900 billion bailout program in December under President Trump.
Given new fiscal stimulus of $ 1.9 trillion. and a wider COVID-19 vaccination program in the country, investors are likely to receive higher Fed forecasts for US GDP and a slightly lower revision of unemployment forecasts.
For example, the Organization for Economic Cooperation and Development (OECD) last week raised both its forecasts for the world economy and for the United States in particular. Compared to its December forecasts, the OECD raised its expectations for US GDP growth: from 3.2% to 6.5% in 2021 and from 3.5% to 4% in 2022.
However, despite the improved forecasts, Fed officials will continue to point to a significant downturn in the economy and employment.
During Powell’s speech on March 4, the key comment was: “Today we are still far from our targets of maximum employment and inflation averaging 2% over time.”
This will no doubt be repeated during this week’s press conference and used as the answer to all questions.
In December, only one in 17 Fed officials expected an interest rate hike in 2022, and five expected a rate hike by the end of 2023. Some analysts suggest that at least a couple more officials may support the idea of a rate hike in 2023, but this is not in line with Powell’s current statements.
This development could further boost bond yields and create temporary volatility in the market, and concerns about “overheating the economy” among investors are likely to persist.
The next scheduled FOMC meeting will be held in June 2021, analysts predict more changes in the Fed’s rhetoric and position regarding it.