An Important Non-Event

Outside of the geopolitical realm, the June Fed meeting will get top billing this week, although it’ll almost surely be a non-event.

Or at least it should be a non-event. Indeed, it better be a non-event.

After all, market participants have pretty clearly bought the notion that the Committee will stick with the “transitory” talking point when it comes to inflation and that, in turn, means Jerome Powell can’t make the “mistake” of suggesting internal taper talk is advanced.

Remember, it’s not a misquote or some Freudian slip when Fed officials reference “thinking about, thinking about” (so, two thinking abouts) tapering. That’s a reference to a quip from Powell who, when he made the joke, was trying to convey the Fed’s conviction vis-à-vis supporting the domestic economy.

There’s a contingent of would-be market watchers who still don’t understand that, which leads them to erroneously claim, on social media, that Fed officials are accidentally lampooning themselves, when in fact they’re doing so intentionally. The distinction is important because that joke has become part of the forward guidance. If you don’t get it, you can’t evaluate the Fed’s reaction function.

(You might suggest it’s a sad state of affairs when central bank forward guidance has become a literal joke, as opposed to the figurative sense in which people have long responded to policy statements by saying things like “What a joke!”, but that’s another discussion.)

Benchmark US yields fell the most in a year last week. It was the fourth consecutive weekly decline (figure below). The “counterintuitive” bond rally was the story, playing out as it did against another hot inflation print and heavy supply.

There were a number of explanations (see here for the full rundown), but generally speaking, markets seem inclined to believe that the initial inflation “overshoot” was already in the price and that stubborn labor market slack may mean a return to full employment will take longer than expected, giving the Fed cover to slow play the taper.

Powell will need to confirm that narrative this week. He’ll doubtlessly be asked about the juxtaposition between hot inflation and more measured progress on the jobs front. If the last presser was any indication, he’ll be waiting on questions about bottlenecks and supply chain disruptions, which he can spin to his advantage (e.g., “‘Bottlenecks’ and ‘disruptions’ are transitory by nature, so if you want to argue with me, you’ll need to find different words, because I win this semantic debate by default”).

As far as labor market imbalances (familiar figure below), Powell will comment only until the questions relate to the duration of enhanced federal unemployment benefits. He might say the benefits are important when it comes to providing a safety net for the most vulnerable, but he’ll steer well clear of saying whether he believes fiscal policy is holding back the labor market. If anything, he’ll suggest that, on balance, fiscal stimulus is, and will continue to be, crucial to promoting a sustained recovery — that fiscal measures aren’t merely a positive “on net,” but are in fact mission-critical. The implication will be that any near-term imbalances in the labor market that result from the extension of federal benefits for the jobless are more than worth the temporary aggravation.

The April minutes suggested the taper discussion may start at “upcoming meetings,” and officials have echoed that on a number of occasions since. Powell will want to stay consistent, so one challenge will be fielding questions about the extent to which the June meeting marked the onset of those tentative discussions.

It’s entirely possible that the first hike gets pulled forward to 2023. Such a shift, if not accompanied by the “right” mix of rhetoric from Powell, could create some fireworks, although it’s hard to imagine anyone getting too upset. After all, the sequencing here is clear — taper talk first, then taper announcement, then actual taper, then rate hike talk, and only then an actual hike. It’s impossible to complete that sequence in a compressed time frame.

“Rates are priced for a dovish message, so a shift in the median dot and a sense that the Fed has started to talk about the exit can result in a hawkish reaction,” TD said, in their preview.

Ahead of Powell, the market will get retail sales, PPI, Empire manufacturing and housing starts. Literally all of that has the potential to be entertaining, if nothing else. Thursday brings claims and the Philly Fed.

As a reminder, the pre-pandemic peak in retail sales is now so far below where we are now, that we can’t even see it from here (figure above). Some would call that evidence of “too much” stimulus.

“In a testament to lack of excitement expected from the June meeting, the biggest takeaways will be 1) continuation of tapering chatter, 2) the 2023 fed fund dot on the SEP, and 3) any shifts to RRP/IOER,” BMO’s US rates team remarked, adding that “sometimes a Fed meeting is nothing more than an opportunity for the group to get together and the consult the magic eight ball of monetary policy – ‘Concentrate and ask again, Jay.’”

Oh, and a new Bloomberg poll showed that almost 20% of economists think Joe Biden will replace Powell with Lael Brainard. “Around three-quarters expect Biden to keep [Powell] in the job, an overwhelming number that’s broadly unchanged from the April survey,” Bloomberg noted, adding that “Powell has deflected all questions on whether he’d serve four more years if asked, leaving the impression intact that he’d like to stay at the helm.”