Economic Insights

For the past few months the eurodollar futures market has steadily priced in the FOMC’s abandonment of “transitory” in its assessment of inflation. More often than not the Fed follows the market. The typical absence of public comments that precedes FOMC meetings was extended while Biden contemplated renewing Powell’s term.

It’s easy to criticize the Fed. They’ve maintained their uber-accommodative monetary policy for probably a year longer than needed. Once the vaccine breakthrough was announced last November, prudence dictated that they anticipate an economic rebound and begin normalizing rates.

It’s easy to criticize the Fed. They’ve maintained their uber-accommodative monetary policy for probably a year longer than needed. Once the vaccine breakthrough was announced last November, prudence dictated that they anticipate an economic rebound and begin normalizing rates.

The Fed announced the taper of bond purchases will begin this month with $15B and they will also taper in December. Some think the December announcement is slightly hawkish but I think the market just likes certainty so I'm happy they told us December would be the same.

A significant interest rate move has taken place in recent days that has received scant coverage from mainstream financial media. The market has priced in a more aggressive pace of Fed tightening over the next couple of years, while simultaneously moderating the outlook beyond that. This flattening of the yield curve has been reflected in the spread between two and five year treasury securities, which reversed a steepening trend.

Hindsight is 20/20 and the future is always to a degree uncertain. The same is true when looking at the macro environment whether you are an economist, investor, etc. The current macro environment continues to reside under the COVID-induced cloud of uncertainty, spawning overreactions, underreactions, and misdirection.

As we approach the end of the summer, Covid-19 health risks remain prevalent. The new delta variant continues to shed uncertainty around a robust economic recovery. Amid the new variant’s increasing infection rates (even in vaccinated individuals), the Federal Reserve announced that the in-person plans for the Jackson Hole symposium would be replaced with a virtual event on August 27, 2021.

This week the FOMC meets on Tuesday and Wednesday. Most recently released minutes suggest that the gradual cessation of the $120BN in monthly bond buying ($80BN in US treasuries and $40BN in mortgages) is getting closer.