Off the Federal Reserve’s Federal Open Market Committee’s (“FOMC”) meeting minutes, along with the comments made by Federal Reserve Chairman Jerome Powell at the traditional post-meeting press conference (discussed in detail below), major shifts ensued this week across several markets.
By the end of the week, stocks fell for a fourth straight day, extending a bout of volatility ignited by the surprise hawkishness out of the Federal Reserve, in addition to the massive number of stock option expirations on Friday. The Dow Jones Industrial Average (“DJIA”) saw its worst week since January as investors stepped back from trades tied to expectations for hot economic growth and inflation. The tech-heavy Nasdaq 100 Index dropped from its record high.
Yields on shorter-maturity Treasuries jumped Friday after St. Louis Federal Reserve President James Bullard commented, beyond what was released from the FOMC minutes, that the central bank in fact has started discussing scaling back the pace of its pandemic bond-buying, or “tapering”.
Also in the wake of the FOMC meeting, most commodities slumped while the U.S. dollar touched a two-month high on higher interest rates.
Crop futures plunged Thursday across the board, with grains notching their worst rout in a dozen years. Soybeans wiped out this year’s gains and grains lost more ground as better weather and uncertainty over the U.S. biofuel policy is eroded their bullish sentiment. A stretch of better weather across America’s farmlands, concern about the Biden administration’s biofuel rules, and fears of slowing U.S. hog exports are sending prices lower and raising questions on whether the recent rally to their multiyear highs peaked as they dropped the most in almost seven months. Corn, soybean oil, and canola futures all dropped by their respective exchange limit down circuit breakers.
Dot plots are well known as the method that the FOMC uses to convey its benchmark federal funds interest rate outlook. At the committee’s meetings, the FOMC members place on a dot (17 of them at this most recent meeting) denoting their projections for future federal funds rates at year-end for the subsequent two years and in the more vague “longer term”.
The Current June 2021 FOMC Dot Plot
Longer-term interest rates jumped ten to 13 basis points (0.10% to 0.13%) Wednesday as the FOMC dot plot shows the potential for rate increases in 2023, as well as possibility of a rate hike in 2022. The market was caught off guard by the hawkish tone exhibited in the dot plot. Also, the Fed will begin to discuss tapering at future FOMC meetings. Below is a summary of the FOMC meeting and the Fed Chairman Powell’s accompanying press conference.
Key Takeaways from the June FOMC Meeting
- The FOMC voted unanimously to leave the federal funds target rate range unchanged at 0.00%-0.25%, where it has been since March 16, 2020. The Committee unanimously agreed to continue its accommodative monetary policy despite noting that “progress on vaccinations has reduced the spread of COVID-19 in the United States.”
- The dot plot shows two interest rates hikes in 2023, marking a significant shift in FOMC sentiment since the previous dot plot release in March (see below). While all 17 officials expect no rate hikes through the end of 2021, seven officials expect a rate increase in 2022, up from four in March. As for 2023, 13 officials expect a rate increase, up from seven in March, leaving only five officials expecting no hikes through 2023.
The Previous March 2021 FOMC Dot Plot
- While the dot plot reflected a hawkish adjustment to the FOMC’s stance, there was no change to the Fed’s asset purchase plan as current activity will continue “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” Currently, the Fed purchases at least $80 billion of Treasury securities and $40 billion of mortgage-backed securities each month.
- The statement adjusted its language on the pandemic and economic risks, noting that “progress on vaccinations will continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain.” Additionally, there was no change regarding inflation in the policy statement as the transitory language remains.
- The Fed updated its Summary of Economic Projections, a set of estimates for how the economy and interest rates will develop in the coming years. The June projections revised the Fed’s growth forecasts upward for 2021, now expecting GDP to jump by 7.0%, compared to a 6.5% increase in March. The median projection for the unemployment rate remained the same at 4.5% by year-end. Core inflation is expected to rise by 3.0% in 2021, up from expectations of 2.2% in March. The FOMC has continued to revise their inflation expectations higher during the last three Summary of Economic Projections, suggesting they continue to underestimate the magnitude of actual inflation.
Fed Chairman Powell’s Press Conference Summary
- With the dot plot now reflecting two rate hikes by the end of 2023, Powell was questioned on the significance of the hawkish shift during the press conference. While he noted that “the dots are not a great forecaster of rate moves,” he did concede that many participants are seeing the Fed’s goals hit sooner than expected.
- Since inflation has been the focus of markets since the beginning of the year, Powell was questioned on the recent inflation spikes continuing to emerge in the economic data. While he noted that inflation has been above expectations for the past few months, he emphasized that incoming data shows inflationary pressures are directly tied to industries affected by the reopening. That notion reaffirms the Fed’s stance that temporary bottlenecks and shortages are underscoring the accelerating inflation, and it is expected to remain transitory.
- Although recent labor data has been undershooting expectations, Powell sounded considerably optimistic, stating that “we are on a path to a very strong labor market,” and in one or two years it will be very strong. Despite the optimism, he did note factors that are holding back the labor recovery, including: concerns about COVID-19 when returning to work, childcare issues, and accommodative unemployment insurance benefits.
- Despite the consensus expectation being no adjustment to asset purchases, markets were looking for guidance on when a taper plan may occur. Powell said, “you can think of this as the ‘talking about talking about meeting,’” implying that at coming meetings, the Fed will assess progress toward its goals and the timing of tapering.