Recent Views From The Fed

The main focus for traders is today is of course the March FOMC meeting. With bond yields on the rise, both in the US and globally, the market is keen to seen how the Fed will address these conditions and if there will be any shift in its recent assessment of this current theme. The Fed has so far remained consistent in its message that it is not concerned by rising bond yields, given that broader financial conditions remain accommodative, and is not troubled by rising inflation expectations either. Several members since the last meeting have reiterated these views along with reaffirming the Fed’s view that current policy will remain in place for “some time” with a tolerance for inflation to overshoot a little in the short term if needs be.

Fed To Compromise Between Optimism & Caution

Looking to today’s meeting then, there are small upside risks. Given the pace with which the vaccination drive is progressing and the general pickup in the economy, both current and projected, the Fed is likely to revised its growth and inflation forecasts higher. We’ve seen a similar shift from other central banks recently and so a base level of optimism here is to be expected, the key for the Fed, however, will be in tempering this message with some caution around inflation and its policy plans. Essentially, if the Fed reiterates its message that it is not troubled by inflation expectations and views any rise in inflation as temporary, with no plans to adjust policy this year, this should see a rather subdued reaction to the meeting, which is the base case scenario. This should keep USD supported though the response in treasuries will be the main driver. If the Fed pushes back firmly against rising yields and inflation expectations this could send yields tumbling, allowing equities to recover as focus shifts back to the $1.9 trillion stimulus package.

Upside Risks

Alternatively, if the Fed revises its economic projections higher and sounds more upbeat on the economy and raises the prospect of tapering at some point in the near future, this could be firmly bullish for USD. However, given the Fed’s language over recent weeks, there is a slim likelihood of the bank taking this tone today. Retail Sales data released yesterday showed consumer activity falling back in February, following a strong increase in January from the stimulus cheques. This likely supports the Fed’s view that the recovery still has a great way to go.

Beware the Dot Plot

One further bullish risk, however, will come from the dot plot. The dot plot forecasts essentially map out where each member views rates will be over the horizon, 1, 2 and 3 years. These are submitted before discussions begin and are a good indication of how policy is likely to be set over the measured horizon, offering low high and median views on rates. If these dots have moved materially higher, this could trigger a big rally in yields, sending equities firmly lower.

Technical Views

US10Y

The rally in the 10-Year yield has seen price moving above the 1.422 and 1.503 levels now with 1.50 recently acting as support when retested. While price holds above here, the 1.683 level is the next hurdle for bulls. To the downside, any break of 1.422 will see the 1.282 level coming back into play as support.

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