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Podcast: June 17, 2021 – FOMC Meeting Recap

Jim Barnes, Senior Vice President and Director of Fixed Income at BMT Wealth Management, discusses the Federal Open Market Committee (FOMC) held on June 15/16.  At this meeting, the FOMC revised its projections for the federal reserve target range from no rate hikes through 2023 to 50 basis points (0.50%).  The U.S. Treasury curve shifted higher immediately following the 2:00 statement to reflect the more hawkish tone.  Discussions regarding bond tapering formerly began but no changes were made.  Instead, during the post-meeting conference, Federal Reserve Chairman Powell simply said discussions will continue at upcoming meetings.

Transcript

Introduction:

Welcome to the Bryn Mawr trust Wealth Management podcast, providing commentary on what’s moving the financial markets, financial planning, and other timely business and monetary topics. Please welcome today’s host Jim Barnes, director of fixed income at BMT Wealth Management.

Jim Barnes:

Hi, this is Jim Barnes director of fixed income here at Bryn Mawr Trust company. Great to be with you once again, to talk about today’s FOMC meeting. What we’ll do is we’ll talk about some of the, some of the key events, financial market activity that we’re leading up to today’s meeting some of the things that that we were looking out for. There were some some hot topic items, such as the summary of economic projections, quantitative easing, the administered rates. Some of the things that we thought would be key, key areas that the fed would most likely discuss. And then we want to find out exactly and talk a little bit about what did transpire, what were some of the decisions that the fed that the fed made today? Of course, at the, at the end of the meeting, chairman, Powell has his his, his typical Q and A session.

Jim Barnes:

And that was always, that’s always very important to, to listening to it, which we did. And, and so there was some key findings there that we want to talk about. Overall, we’ll talk about what the market reaction is. And then at the end of the day, when we take it all together, what is our take? And what’s our, what’s our views, as we think about the second half, believe it or not the second half of of 2021? But I guess the first thing really here is the, when you think about some of the, some of the events leading up to today, you really have to focus in on, on the inflationary data. The inflation has been, has been running very hot and just to put some numbers behind that consumer prices in the month of may, they jumped up 0.6%. That’s the second largest advance that we’ve seen over the past decade.

Jim Barnes:

They’ve jumped up 5% over the past year. And when you think about 5% of inflation over the past year, when you know, the federal reserve tends to target that 2%, I mean, that’s a pretty big difference when you take out the impact from food and energy for CPI that jumped up 0.7% in may and and close to to 4% close to 4%. So 3.8% over the past year. And that’s actually the highest number that we’ve seen since since 1992. What’s interesting is as these high inflationary readings have been coming out at the same time, you’ve had a number of participants of the, of the federal reserve, downplaying them to some extent yeah. They acknowledge that. Well, yeah, this is, you know, we were definitely have some, some inflation that’s out there, but at this point we’re not overly concerned because we think, you know, when you think about the economy and the reopening, you know, we think a lot of these high readings today won’t necessarily be there tomorrow.

Jim Barnes:

And basically what they’re, what they’re referring to is they think that the, the inflationary data, to some extent, we’ll be, we’ll be transitory with that being said, it does seem as if at least the, the, the bond market’s been listening. The 10 year treasury yield to hit 174 back on March 31st. And when I think about today, it’s, it’s right around one and a half percent as we were heading into today’s meeting. So when you think about that that drop coming at the same time when you have these hot inflation readings, that transitory rationale, it seems to be sticking somewhat. What were we looking for at a at today’s meeting? Well, a few different things. First has to do with the summary of economic projections and that’s case. So the summary of economic projections, that’s where participants of the FOMC, they give their projections for for the unemployment rate GDP inflation and the all-important federal funds target rate.

Jim Barnes:

So that’s key area. They make a revisions to that four times a year. And this just so happens to be one of those meetings where the, where the revisions come through. The other obvious area that we were paying close attention to is as most listeners have a today’s meeting, where it was simply just discussions around tapering where they’re going to have those discussions. Is this a meeting that would actually start then debating whether or not it made sense to begin scaling back some of their monthly bond purchases, which we know adds up to about 120 billion to consisting of treasuries and and agencies. And, and then the third thing I would say that’s that, that was important. And it probably gets little, little, no, that it’s, but just the, the administered rate. So the rate that the Andrews rate that the fed pays banks on their, on their excess reserves, that was somewhat of a, of a focus to us as well, just because that the effect of federal funds rate has had Insta had in slower to six basis points, which at the end of the day is getting closer and closer to that lower bound of 0%.

Jim Barnes:

But we were kind of interested to see if they would make any adjustments to specifically the interest on excess reserves, as well as the rate that they have for the reverse. So getting right into it, what happened? I would say that the key theme by far the key theme, really centered around just adjust inflation. And we talked about the high inflationary data that came through in, in May and through April is enter April as well. And that definitely the, the high inflationary did it definitely factored into when you look at the projections for inflation within the summary of economic projections at the end of 2021, there were big, there were some big revisions there. And just just to, to note them real quick. At the end of March or I should say March meeting PCE inflation was projected to be 2.4% at the end of 2021 that was projected a lot higher at this meeting while we have to 3.4%.

Jim Barnes:

So to say that, to say that again, over the past three months, participants dialed up their expectations for inflation this year from 2.4%, all the way up to 3.4%. And that same, that same relationship is, is noted within the core PC as well. At more, the projections were at 2.2 in eight, jumped up to 3%. So I think that just shows that you know, the inflation that we’ve seen, it’s, it’s, it’s definitely there. It’s definitely within a, definitely within a numbers and definitely influencing, you know, the participants FOMC participants expectations for, for inflation this year, you know, plays out going forward is something that we’re going to have to talk about a little bit, but it definitely seems as if that had an impact on, on the plot. And the dot plot is something that has you know, has been getting a lot of attention till he gets it a lot of attention at every meeting.

Jim Barnes:

And the dot plot is simply the projections for participants’ expectations of that federal funds, the federal funds target rate. And, and the takeaway from the last meeting, those dots, there were sitting the, the expectation for that first rate hike, you know, wasn’t going to be until 2024, again, they’re just projections. But based on a dot plot at that time, the likelihood of any right high coming through 2023 was, was on a, it was on a low side, especially relative to to the revised projections today. Because at the end of the last meeting again, the federal funds target rate was expected to be at 0% to the end of 2023. That was revised higher, for a couple of rate hikes in 2023. So just think about that before we were thinking that they were going to be no rate hikes over the next few years, to the end of 2023, and now, and now we’re thinking of, you know, maybe there might be a 50 basis points or so so you could imagine that that one investors a little bit by, I surprised I think that there was some anticipation that maybe they would yeah, move forward a rate hike to 2023, just based on the inflationary data, the fact that, that we, we saw to that day, well, you had some, some market reaction that I’ll get into in a second on the quantitative easing front, which, which is very important there.

Jim Barnes:

I thought it was more subdued. There really wasn’t any, any key insight to changes as to what their expectations are. If anything, it seems like they’re just, they continue to look at the data. They’ve already made it clear that they’re not going to make any changes until they they’ve seen substantial progress towards their goals. That’s, that’s reiterated pretty consistently at, at the conclusion of every, every meeting. So I think the quick takeaway there is that improvement that they’re looking for. It just hasn’t been there. I mean, they, they see areas improving, I should say. But substantial improvement at this point hasn’t necessitated them to, to make any adjustment to their, to their tapering program. And then the last thing, as I mentioned before, with the, with those ministered rate, then the interest rate they pay on excess reserves, as well as the rate on the reverse repo facility, you know, the federal reserve actually did adjust both those rates higher.

Jim Barnes:

So the, the rate on their interest of excess reserves went from 10 basis points up to 15 basis points. And the rate on the reverse repo facility went from a one from zero to five basis points. And that’s key. We’ll have to see how that influences the funding markets and see if we can get some, some low short term investments a little bit further away from 0%. At the press conference. Yeah. He got a number of questions on Chairman Powell got a number of questions on, on inflation and, and if he’s concerned and he really focused in on that transitory inflation, sustainable debate, which, which one, where, where are we headed going forward, the sign inflationary reads, you know, what does that look like? You know, at the end of this year, 2022, and from Powell’s perspective from the Fed’s perspective does seem as if they continue to believe, you know, when we think about bottlenecks, when we think about you know, just a depend up demand, the, the, the reopening after, you know, being with more people, being able to kind of revert back to pre-pandemic times. I mean, all of that’s had a very big influence on economic growth and inflation. And it’s not supposed to continue going forward. You would think that some of these inflationary factors based on those areas will start to taper off. And I think that was chairman Powell’s predominant message when it came to specific questions regarding the quantitative using program. He said, listen, you know, we’re not we’re just not there yet. We think we have acknowledged progress. And, and and you can, you can officially say that today we formally began talking about about you know, the, the, the tapering aspect.

Jim Barnes:

So you can remove one of those talking about talking about so now we’re, you know, now was time, but they haven’t, you know, they haven’t reached their goals. Instead, in terms of you know, providing enough progress to, to, to warrant lift off. Or I should say he just a tapering back up their monthly bond purchases. The dot plot, I thought was very interesting. He said, listen, yes. You know, obviously we, we, we pushed for you saw based on the projections, but now there are a couple of rate hikes at 25 basis points each. So a total of 50 basis points that are projected. I mean, these are just projections for 2023, but they’re still well off into into the future. And chairman Powell, you know, basically said, look, we’re not even, we’re not looking at, at, at an interest rates. It is just way, way, way too soon to even start thinking about adjusting policy on that front, if anything, there’s, you know, the way more focused in, on their quantitative easing program and trying to determine when it makes sense to start tapering that back to try to also think through, you know, when does it started making sense to, to adjusting the interest rate policy.

Jim Barnes:

It’s just not in the cards at this point. So even though, yes, the, the dot plot did show two more rate hikes there. And in 2023 I thought chairman Powell kind of downplayed the overall the overall significance of that. With that being said that the bond market did not. And I guess first starting off at the end of the meeting at the end of the, the trading day, all your major U.S. Equity indices, your Russell, 2000, your Dow Jones, NASDAQ, S&P, they all ended the day in the, in the red. Bond yields jumped up across, they increase across the yield curve with the belly of the curve sustaining the biggest increase. I think that the five-year U.S. Treasury note was up you know, over 10, over 10 basis points. And that’s somewhat expected, you know, when you think about if you have investors that are moving up, their expectations for rate hikes that does tend to put more influence on the shorter part of the curve and, and the belly of the curve, at least in in regards today’s trading activity.

Jim Barnes:

So our overall thinking for this you know, now we have another FOMC meeting behind us. I mean, a big thing here. It’s, it’s less on a dot plot and it’s really focused in, on that transitory sustainable debate because at the end of the day, you’re, you know, that first rate hike, at least for now is in projected to come until 2020. But what we got to get an idea of what’s happening with this based on where inflation is right now, how much of that’s transitory and how much of that is sustainable. And it’s just, it’s impossible to answer that question. It really is. It’s just impossible to answer that question today. You simply need just more time to see how inflation transpires month after month after month, if you start to see the monthly readings come down then from there, you can say, yeah, it looks as if you know, the, the reopening of the economy, you know, that had the a transitory impact on inflation, not necessarily sustainable.

Jim Barnes:

But again, we can only answer that as, as time goes on and we continue to we continue to pay attention to the data. I think the one thing just to keep in mind, just based on the Fed’s new framework and just based on, you know, comments over and over again, all leading into the same direction. And that’s simply that the fed they’re going to remain patient and removing accommodative policy. They want to see continued improvements in the labor market. They want to get back to where we were back in 2018. They’re in absolutely no hurry to you know, to start taking back some of this accommodation. But with that being said, I mean, they are, they are sensitive to inflation running too high, and they’re going to be paying very close attention to it. So I think that from our view, we continue to believe that the fed, even though they were sensitive to inflation, they will err on the side of we will err on the side of caution.

Jim Barnes:

But at this point it’s very difficult to know what the path of interest rates looks like going forward until we have a better feel for that transitory sustainable debate that’s going on with that being said I mean, today was a lot of fun with a lot of key areas. We talked about a lot of key areas were discussed. And and so we, we look forward to catching up with you again at the, at the next meeting, which is on July 27th and July 28th until then this is Jim Barnes director of fixed income. As always, if you have any questions, please feel free to go ahead and visit us at our website, www.bmt.com. Thank you very much.

Closing:

This has been a production of Bryn Mawr Trust. Copyright 2021. Visit us online at bmt.com/wealth. The views expressed herein are those of Bryn Mawr Trust as of the date recorded and are subject to change without notice. Guest opinions are their own and may differ from those of Bryn Mawr Trust and its affiliates and subsidiaries. This podcast is for informational purposes only and should not be construed as a recommendation for any product or service. BMT Wealth Management provides products and services through Bryn Mawr Bank Corporation and its various affiliates and subsidiaries, which do not provide legal, tax, or accounting advice. Please consult your legal, tax, or accounting advisors to determine how this information may apply to your own situation. Investments and insurance products are not bank deposits, are not FDIC insured, are not backed by any bank or government guarantee, and may lose value. Past performance is no guarantee of future results. Any third party trademarks and products or services related thereto mentioned in this podcast are for discussion purposes only. Third party trademarks mentioned in this podcast are not commercially related to or affiliated in any way with BMT products or services. Third party trademarks mentioned in this podcast are not endorsed by BMT in any way. BMT may have agreements in place with third party trademark owners that would render this trademark disclaimer not relevant.