• Unlike the ECB, Wednesday’s Fed meeting probably will not be a snooze fest and the outcome is certainly no done deal. We see four moving parts: the QE guidance; the dot plot; technical tweaks to interest rates and/or standing facilities to counter some of the (excessive) downward push on money market rates; and tolerance of inflation.
  • Starting with QE, several Fed-speakers – including key players such as Vice Chair Clarida – have suggested the FOMC ought to “talk about talk about” tapering sooner than later. Our interpretation of those remarks is that the bar for labor market gains has been lowered a tad so that they can have this conversation this week. We expect language along the lines that if payrolls continue to print around current levels in the next several months (500k), a taper announcement will be likely later this year (in September). Alternatively, Powell & Co could make the taper hint less obvious. Take Chair Powell’s guidance from the April press conference: it is going to take “some time” before we see “further substantial progress” in the labor market. Such progress would justify tapering. With different language, Powell & Co could shorten the time frame or simply state that less progress is needed (i.e. further progress instead of further substantial progress).

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