June 12: Fed Rate Decision
While the FOMC has an earlier meeting and rate policy decision on May 1, all eyes are on June 12 as the meeting in which the Fed might implement its first rate cut and/or begin the tapering of balance sheet reduction, also known as quantitative tightening or QT.
While the market was previously expecting rate cuts to come before a reduction in QT, Fed Chair Jerome Powell surprised markets at the last FOMC on March 20 by suggesting that a reduction in QT could come as early as this June meeting. Risk assets cheered the news and rallied in the wake of the announcement.
QT effectively reduces financial market liquidity by reducing bank reserves. As banks have less reserves, they are forced to sell other balance sheet assets, often pushing the price down, to ensure they have adequate reserves. If they have excess reserves, they can effectively create new money in the economy by lending out those excess reserves to borrowers.
A reduction in the pace of QT would act as relief on bank reserves and be bullish for financial market liquidity.
April 10, May 15, June 12: CPI Reports
Whether or not the Fed raises rates, or reduces the rate of QT, at that June 12 FOMC meeting will likely be determined in large part by the three inflation readings we get between now and then.
In the last meeting, the Fed said it thought the recent bump in CPI was related to seasonal factors, and it remains confident inflation is on a downward trajectory to 2%.
If they’re right, and inflation comes down over Q2, we are likely to see more accommodative monetary policy from the Fed.
However, if it doesn’t and instead continues to tick upwards, the market and the Fed may need to reset their expectations for monetary policy altogether.
