Stocks traded flat again this morning in anticipation of Fed Chairman Jerome Powell’s post-meeting statement, set for 2 pm EST this afternoon. Soaring inflation, asset bubbles, and unemployment are expected to be the main topics of discussion.
Most important of all, however, is whether Fed officials mention tapering of bond-buying programs.
By and large, economists believe the “t-word” will come up in the Fed’s deliberations. Several officials within the Fed have said over the last few weeks that the tapering conversation needed to begin, and soon.
But that doesn’t necessarily mean Powell, the man responsible for the current bull run, will say anything about tapering in his after-meeting remarks.
“I think the commentary and the press conference will be interesting. There’s clearly a division on the board and among the Fed presidents about how strong the economy is, and whether it’s time to start evolving the policy,” explained Rick Rieder, chief investment officer global fixed income at BlackRock.
“How the chairman describes that is going to be very interesting. It’s hard to say it’s [going to be] hawkish because […] I think it’s going from uber dovish to overly dovish.”
BlackRock is among the several major money management firms that have benefited from the Fed’s “uber dovish” policy. Squashed rates kept things easy-breezy across the industry.
But this kind of monetary policy has also contributed to the growing wealth gap in America. To those that can take advantage of cheap debt, the last decade has been one heck of a ride. Everyone else, meanwhile, was forced to watch as their savings accounts were slowly salted away by an ever-expanding monetary base.
Now, though, the Fed has taken dovishness to new heights in the wake of the Covid pandemic. This hurt “the little guy” significantly opposite firms like BlackRock, which have maximized revenues.
And many analysts expect more of the same from Powell after the June FOMC meeting wraps up later today.
“The message this week will likely be a heavy dose of ‘still a long way to go’ sprinkled with concerns about upside risks to inflation. We do not expect the debate about tapering to be robust, but simply beginning the discussion and expressing concerns about the strong inflation impulse should carry hawkish overtones,” wrote Barclays economists in a note.
Goldman analysts had a similar take in the bank’s note to clients. Moreover, they believe Powell shares the opinions of New York Fed President John Williams and Governor Lael Brainard, neither of whom support tapering just yet.
“We think that Powell likely agrees with Governor Brainard and President Williams that the labor market has not yet come far enough. We continue to expect the first hint in August or September, followed by a formal announcement in December and the start of tapering at the beginning of next year,” said Goldman economists this morning.
Keep in mind that in a recent poll, the vast majority of Wall Street believes inflation is transitory. It’s something Powell has reiterated time and time again over the last month.
In response, skeptical economists came out of the woodwork to argue that’s simply not the case. So too have billionaire investors like Paul Tudor Jones.
Heading into the close this afternoon, there’s likely to be a big reaction from the market. But which way will stocks go? Bulls already seem worn out after two excruciating rallies in May and June.
Will they be able to spur on another leg up if Powell keeps things “uber dovish?” Maybe, maybe not. Either way, a short-term correction from the highs seems likely, even if it doesn’t spiral into a larger scale sell-off.
Simply because the Fed won’t allow it to.
