FOMC: Actions Not Words

Macro Highlights

•    The FOMC meeting dominates the week ahead. It will update its macro forecasts. 
•    The March forecasts showed 11 of 17 officials did not expect that a rate hike would be appropriate until after 2023.  Has the consensus weakened?
•    The December 2022 Eurodollar futures appears to have a 25 bp hike largely discounted. 
•    Several Fed officials have suggested that a discussion of the pace of buying is likely in the upcoming meetings.  Surveys show that tapering is expected in Q4.
•    The central bank of Norway meets and is unlikely to back off from its indication of intentions to hike before the end of the year despite softer than expected inflation.
•    The Bank of Japan meets as well.  It too will update its economic projections.  The economy is likely to rebound in H2.

The Federal Reserve’s Open Market Committee meeting is the most important event in the week ahead. It is not that it will take fresh policy action.  Rather its observations about the economy and its forward guidance are the focus.  Since the Fed last met in April, job growth has slowed, and prices have accelerated. 

Job growth averaged 661k a month in Q1 but slowed to 419k in April and May. Other labor market metrics, like the weekly initial jobless claims, continue to trend lower. The four-week moving average used to smooth the volatility has fallen to 402k, half of what it was at the end of February. Other labor market metrics, like job openings, suggest improvement will continue.

Perhaps one of the most disturbing statistics is that the labor force participation rate has averaged 61.5% through May. It averaged 63.1% in 2019 and 62.9% in 2018. This likely reflects the uneven re-opening of blue states/red states and sectors, including school and daycare. There may have also been an interest in earlier retirement during Covid. At 61.6% in May, the participation rate is at levels seen in 1976-1977.  

Marc Chandler

Managing Director
Bannockburn Global Forex
www.bannockburnglobal.com