Latest from the FOMC: Small step toward normalization

Gary Pzegeo, CFA

June 16, 2021

Summary of the most recent meeting by the FOMC.

The Fed officially made no change to policy, but today’s meeting (June 16th) can be seen as a small step toward policy normalization. The process may have started in April, where the meeting minutes highlighted a group of Committee members “talking about talking about tapering”. Several members of the Fed have broached the subject since the April meeting and market expectations for a discussion of tapering have grown in kind. Discussion of tapering may have contributed to wider yield spreads in mortgage backed securities and a flatter yield curve in the weeks leading up to today’s meeting. In the end, there was no mention of tapering in the Fed’s official release although it was discussed at length in Chair Powell’s press conference. The most significant piece of information was perhaps from the dot plot, where we saw a majority of Committee members project rate increases in 2023. 

Current conditions

There was little change in the FOMC statement in regards to growth or inflation. We believe that the most notable change was in the Fed’s “health assessment”, where they struck a more positive tone than in prior meetings. Progress on vaccinations was noted, which has been a key variable underpinning the degree of accommodation. Data from the Committee’s economic projections reflect an expected increase in activity for the full year in line with recent releases. Powell remarked that supply chain bottlenecks were larger than they expected and that the Fed was unsure about when some of these inflation drivers would ebb.

Forward guidance

Powell noted that the economy was still far away from achieving substantial further progress toward the Fed’s goal, but progress is being made. He stated at the press conference that the Fed would assess progress toward its goals and announce intentions with regards to tapering. The Fed’s median rate projections for 2021 and 2022 remained at the current level of 0.125%. The median projection for 2023 increased to 0.625% from 0.125%. Powell tried to downplay the importance of the dot plot, but the change appeared to surprise some. Two rate hikes is actually what markets are expecting through the end of 2023 according to futures contracts.

Policy/market reaction

Short-term market rates have been trading below the Fed’s target due to a glut of reserves and cash in relation to supply. The Fed, in an effort to address the mismatch, increased a rate paid to member institutions by 0.05% on excess reserves. The committee unanimously supported the existing policy. Bond yields moved higher and the Dollar was stronger against large trading partners in response to the increase in 2023 rate projections. 

View the full FOMC statement.

Gary Pzegeo joined the firm in 2007 as head of fixed income, focusing on portfolio management, trading, policy formulation and client service.