Five things to watch from the Fed meeting

At 6pm (UK time) the US Federal Reserve will update the market with their outlook and policy statement, here’s five things we’ll be keeping a close eye on

1. FOMC economic projections

The Federal Open Market Committee (FOMC) will release their economic projections against a much-improved US economic backdrop compared to its last gathering in January.

COVID-19 cases are dropping, the rollout of vaccinations is accelerating, and Joe Biden’s $1.9tn stimulus is set to hit household bank accounts on Friday. 

Goldman Sachs are expecting output to increase by 8% in 2021 and market expectations are high – will the FOMC pour some cold water on Wall Street’s recovery forecasts?

2. Jay Powell’s tone

Alongside the FOMC projections, Fed chair Jay Powell will deliver a statement and press conference.

He has so far maintained that, despite some hopeful signs, the outlook is still very uncertain, and it remains far from achieving its goals of full employment and 2% average inflation.

Mr Powell will have to strike a careful balance of acknowledging inflationary factors such as the oil price recovery and the stimulus package, as well as fending off fears that the Fed have pumped in too much liquidity too fast.  

3. The dot-plot

The Fed’s ‘dot-plot’ interest rate projections will be outlined in the FOMC statement.

Whilst the Fed are at pains to state the dots should not be taken as a signal of policy, it will no doubt move the market.

In December, the median of forecasts by Fed officials indicated they expected the central bank’s main interest rate to remain between 0 and 0.25 per cent until at least the end of 2023, with one out of 18 predicting an increase in 2022, and five expecting higher rates in 2023. 

The market is split on whether the median view might shift to predict at least one rate increase in 2023 – hence the dot-plot will likely be a source of volatility this evening.

4. US 10-Year Yield

10-year Treasury yields to the highest level in more than a year, heightening volatility on Wall Street and raising some concerns about a premature tightening of financial conditions. 

As can be seen from the chart below, yields are moving higher at an accelerating rate and traders will be looking for the Fed to address this key issue this evening.

5. S&P 500

The broke to new highs this week, but after an indecisive session yesterday, prices are now back below resistance.

A key focus for stocks will be the Fed’s willingness to tackle accelerating borrowing costs. And if Jay Powell continues to skirt around the subject, we may see a repeat of February’s sell-off.