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FED Signalling to Stay Dovish Longer, Despite Economic Boom in the US

Posted Sunday, March 7, 2021 by
Skerdian Meta • 2 min read

The FED has announced a policy shift

As the data has shown in the last several months, the US economy has been improving quite fast and the pace is increasing. Manufacturing and services are at the highest level of expansion for the last few years. The GDP is also increasing at a nice pace, as confirmed by the latest GDP report from the New York FED GDPNow which was released on Friday.

Weekly New York Fed GDPNow

New York Fed GDPNow +8.7% vs +8.6% last week
Last week was +8.6%
Q2 estimate at 4.0% vs 3.9% prior

NY Fed comments:

Negative surprises from international trade data accounted for most of the decrease in 2021:Q1, while positive surprises from ISM manufacturing survey data accounted for most of the increase in 2021:Q2.

But, the FED is giving signals that they are reluctant to start tightening the monetary policy anytime soon, despite markets pricing in a faster action. The eurodollar curve has fully priced in an FOMC interest rate hike in December 2022. That’s in stark contrast to Fed forecasts and messaging so one side has to be wrong. Normally that would be the Fed but maybe the rules of the game have changed.

What the bond market might be seeing is +2% inflation in December 2022 and a strong economy. Normally, that would be the start of a hiking cycle. But the FED says it will act differently this time. Almost every FED official has promised to run it hot for awhile and the comments below from Bostic and Bullard confirm this. We’ll also need to get through some tapering and withdrawal of fiscal stimulus to get to the point where hiking is appropriate.

FED’s president jerome Powell also didn’t indicate any action soon, despite the great economic numbers. He said this week that he “would be concerned by disorderly conditions” and a “persistent tightening of financial conditions”. The obvious subtext to that is that we’re not in that position now.

Atlanta Fed President Bostic

Monetary stance is appropriate
Baseline forecast is 5-6% GDP growth in 2021
Response to recovery is going to have to be different than past recessions

Feds Bullard speaking ahead of the quiet period

Wait and see on inflation because we’ve been too low
Fed policy can be less preemptive on inflation
May see more inflation in 2021, 2022 then we are used to
Looks like were going to have robust economy in 2021
Don’t see operation twist as an option now
It’s not matching up right now that we need to be more dovish than we are
Markets trust the Fed to keep inflation under control
Would welcome inflation above 2% on a sustained basis
It’s okay if were 0.5% above feds target for some time
Better outlook is bringing real yields higher
10 year yields now returning to pre-pandemic levels
Would be concerned by disorderly trading; we are not at that point
Still need a lot of repair in the labor market
Getting lots of reports about shortages of goods and products
Makes sense that commodity prices would be on a tear as pandemic nears end
Commodity price jump doesn’t equal sustained inflation
Sees unemployment falling to 4.5% by the end of 2021 (the current unemployment rate is 6.2%)
Could see inflation above 2% by the year end