No change is expected from the Fed today. Market participants will focus on the IOER decision and look for hints of tapering.
The Federal Open Market Committee (FOMC) statement is due today. While the market expects the Fed to do nothing, some watchers suggest that a hike in Interest On Excess Reserves (IOER) might be on the cards.
Market participants are still divided as to when the Fed will raise rates or announce the tapering of asset purchases. However, the consensus is that no tapering will be announced today despite a sharp rebound in US activity.
Money markets are pricing the first rate hike by December 2022, although even that may be premature. However, if the Fed signals that it is driven by data, and the data points to an overheating economy, then nothing is off the table.
Will The Fed Raise the Interest On Excess Reserves?
The Fed has many tools in its toolbox, and all of the tools used during the pandemic are still in place, despite a sharp improvement in US growth.
Solid vaccination progress and strong fiscals have driven much higher US economic growth, and future infrastructure spending plans point to even faster growth. However, the Fed is unlikely to announce the tapering of its $120 billion per month asset purchases, preferring to be patient instead.
Inflation fears are mounting. Lumber and corn are through the roof, putting pressure on construction and food prices. Eventually, these prices will be passed from producers to consumers and will appear in the headline and core inflation. Yet, the Fed will likely wait to see inflation happening before acting.
As for the IOER, the money markets are flooded with liquidity at the moment. Some voices argue that it is time for the Fed to raise the IOER slightly from the 0.1% level it has sat at since March 2020. However, such a move is dangerous because it will be hard for the Fed to communicate its intention to drain liquidity while staying accommodative.
In summary, the US dollar remains offered across the board ahead of the Fed statement, and the stock market is close to all-time highs. Why would the Fed want to change anything today?