While the Fed meeting tonight is unlikely to result in a resolution on tapering, a number of technical concerns are on the table, making the meeting all the more interesting.
Here’s what to look out for:
- On USD liquidity: it has already essentially peaked, thanks to the 5 basis point boost in the ON RRP facility, which encouraged further use of the facility. Just this week, we could see an additional $200 billion in liquidity from the TGA drawdown (the US Treasury is compelled to spend funds from the liquidity buffer due to the debt ceiling).
- On the Fed funds rate: the actual fed funds rate is 10 basis points, which is still 2.5 basis points just below mid-point, so there was no reason to assume the Fed regrets raising the ON RPP and IOER rates by 5 basis points before summer.
- On QE: The Fed has recently started “stealth-twisting” it’s QE program with an increasing WAM of the SOMA-portfolio. The increasing WAM of the SOMA-portfolio could be an early sign that the Fed intends to maturity-sugarcoat a tapering process that arrives EARLIER than anticipated.
- On inflation: Powell can still explain most of the recent inflation spike as temporary because it is caused by only a few factors such as secondhand automobiles (due to a chip shortage), transportation costs (a re-opening base-effect), and energy prices. Expect to hear the term “bottleneck” a lot tonight.
