Richard Bailey
The meeting of the Federal Reserve this week is very much expected to be limited in policy change – a ‘place holder’ meeting as its known; however this does not mean there will be no opportunity. Preparation throughout Axia will still be done just as thoroughly as a perceived ‘big’ meeting – opportunities will be more nuanced and expectation need to be managed away from expecting a huge move and more towards slight shifts that provide smaller but valuable chances for the well prepared.
Tapering Coming – But When?
The main focus is when the Fed will start to Taper its huge assets purchases, this has been a question bubbling along all year since the Fed brought in the reference to ‘substantial further progress’ at it December meeting. Whilst today has no expectations for a change in guidance or policy clues can still be gleaned from the statement and perhaps more importantly the Q&A session half an hour after the statement release
Is a Fed Statement Change Necessary?
Data has continued to improve since the March decision and is moving inline with the Fed’s forecasts of rising inflation and GDP with continued falls in unemployment. Indeed, headline CPI hit 2.6% at last release, whilst Unemployment has continued to fall to a post crisis low of 6% (still a way off consistent sub-4% area pre-Covid). As such the first part of the statement that deals with the assessment of Current Situation may require some updates, in particular reference to economic activity “has turned up” and inflation “continues to run below 2%” may both need upgrading. This would not be the major shift – the Virus paragraph relating to the outlook is where a clue to Fed’s future expectations lie:
“The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook.”
With vaccines being rolled out successfully and the economy beginning to open up risks to the outlook may have diminished in the Fed’s eyes – giving a clue that the taper discussion is edging closer, faster than many think.
Is It Time To Talk About Talking About Taper?
This is likely to be a question for Chair Powell after his statement – so far the implication of this phase, whilst convoluted is clear: tapering is not on the agenda!
In his last Q&A session Powell stated the time is ‘not yet’ and that advance notice will be given which would suggest the change may be more subtle than simple saying they are going to talk about taper. In your preparation never rule out the outlier and make sure you have a clear plan for it.
The second question will be around Powell’s often used qualification to substantial progress the it will take ‘some time’ to be achieved and that the Fed is ‘outcome based’ not forecast based. with data improving this is another area where a clue could be given to the Fed’s willingness to entertain tapering this year against most analysts expectations that Taper will begin early next year.
Plan Your Trade – Trade Your Plan
Whenever you trade a Central Bank decision and when you are learning to trade Central Banks the most important thing is to have a clear plan of what you are looking for and what you will trade if one of your scenarios plays out. Without this you will be left jumping between markets over the decision and perhaps worse, not being able to see where you went wrong because you have no plan to compare your actions to. Every Central Bank decision can potentially be a chance to make substantial progress in you own Career, not just from a P+L point of few but from a leaning one too.
Richard
