Attention Turns To Fed Meeting After Hints It May Get More Hawkish

Key Takeaways:

  • Fed’s June 16 meeting is front and center heading into new month
  • Focus remains on inflation, jobs after Fed minutes spark “tapering” talk
  • Key companies reporting in June include homebuilders and “stay at home” firms

A lot’s happening in June, but the most intense focus could be on a single event the afternoon of June 16.

That’s when the Federal Open Market Committee (FOMC) wraps up its June meeting and Fed Chairman Jerome Powell addresses reporters. While a Powell press conference is important whenever it happens, this one has more significance than usual because of what the Fed said at its April meeting.

Minutes from that gathering raised the chance of the Fed beginning to plan some sort of “taper” if the economy keeps galloping along. Remember, the Fed’s been snapping up $120 billion in Treasury bonds and mortgage-backed securities each month to provide liquidity and keep rates low during the pandemic, but has said it will begin “tapering,” or slowing the pace of those purchases, if certain employment parameters are met. Chances of a taper happening in the relatively near future suddenly appeared more likely based on the following words in the April minutes:

“A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.”

That statement appeared to surprise some analysts. They hadn’t expected the FOMC to publicly ponder actual tapering until possibly later this year. Those words, along with a string of robust economic data and earnings numbers, might have investors on tenterhooks waiting to hear the Fed’s fresh thinking on June 16. Will it give any hint of how long it’s willing to let things continue rolling full steam ahead? Just how worried are Powell and company about rising prices?

Any sign that the Fed is ready to taper earlier than expected could cause Treasury yields to rise and potentially put pressure on the stock market.

As the Fed Turns…

It’s hard to blame Fed officials for wondering if the economy might be on the verge of overheating. After all, Q1 gross domestic product (GDP) grew more than 6%, the highest in decades. Layoffs appear to be trending much lower, if weekly initial jobless claims are correct, and many companies said during Q1 earnings season that they’re having supply chain issues even while paying more for the raw materials they need. This raises concerns about producer inflation making its way to consumers.

The final straw might have been April’s consumer price index (CPI), which showed more than 4% year-over-year growth, the highest in a decade. Core month-over-month CPI saw its sharpest rise since April 1982, when President Reagan was serving his first term and Powell was a recent law school graduate.

Though the Fed didn’t have all of this data in hand when it met in late April, the signs were already pointing toward major economic growth and price pressure, putting the Fed between the proverbial rock and a hard place.

Powell has emphasized the importance of getting millions back to work, with unemployment still around 6% more than a year after the pandemic began. Earlier this year, the Fed made it very clear it would tolerate inflation above its 2% long-term target until employment got back on track, but this risks the chance of price pressure hurting consumers and companies. Corporate margins look very positive right now coming off huge Q1 earnings growth, but inflation over coming months could change that, perhaps resulting in pressure on stocks.

There could be more Fed remarks in the next week or two, but then the pre-meeting silent period begins and June 16 looms….

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