This Week's FOMC Meeting

The stock market has to get through a number of potentially negative events in this seasonally weak week, including the FOMC Meeting on Tuesday and Wednesday.  Expectations are that the Statement will point to a tapering start before year end.  The meeting's outcome could hit the market hard if the starting date is more immediate.  But, the latter is unlikely, given the mixed views of FOMC members and Powell's re-nomination question.  Instead, there are reasons why stocks could rally after the meeting -- /1/ the tapering should be described as gradual and /2/ the Fed is likely to emphasize its intent to keep the funds rate near zero for an extended time.  

With the possibility of re-nomination as Chair in the background, Powell presumably does not want to disrupt the markets by a tapering decision.  A sharp negative reaction in the stock market could damage his support in Washington,  particularly as it could be compared with the incompetence seen in the Afghanistan debacle.   It also could damage the Fed's reputation.  He will most likely want to make tapering as smooth as possible to avoid these results.

The speed of tapering is important because the Fed is not expected to raise the funds rate until its monthly asset purchases ($120 Bn) are finally over.  A $15 Bn reduction per month would eliminate these purchases in 8 months -- or in June 2022 if the starting date is November  A reduction of $10 Bn each month would end the program in 12 months -- or in October 2022.  So, expectations of the start of interest rate hikes would be for mid-2022 or Q422 at the earliest.   The later the better from the stock market perspective. 

This week's US economic data will highlight the importance of interest rates, as they consist mainly of housing-related releases.  Consensus sees mixed but muted data.  August Housing Starts are expected to edge up, but Permits slip.  August Existing Home Sales are seen down, but New Home Sales up.  There would be downside risk to the consensus estimate of New Home Sales if 1-Family Housing Permits fall again in August.  The latter have fallen for three straight months.  Overall, recent data suggest the housing sector has stalled.

Besides acting against a background of mixed, sluggish data, the Fed will likely be lowering its Central Tendency Projection for 2021 Real GDP Growth at this week's meeting.  It had raised its GDP Growth forecast to 6.8-7.3% (Q4/Q4) at the June FOMC Meeting (was 5.5-6.8%).  But, given the H121 Real GDP Growth Rate of 6.5% and the Atlanta Fed model's current estimate of 3.6% for Q321 Real GDP Growth, growth over the first 3 quarters of 2021 would be 5.5%.  Even, if, as is likely,  the Atlanta Fed model's estimate is ultimately raised to around 4.5%, the 3-quarter Real GDP Growth Rate would be 5.8%.  An unlikely Q421 Real GDP Growth of close to 10% would be needed to reach the Fed's lower bound of 6.8% for the year.  Nevertheless, even a lowering of the GDP Central Tendency would keep it above its 1.8-2.0% longer-run trend, so the Fed still could feel comfortable tapering.

The June Central Tendency for the Unemployment Rate looks too low, as well, but so do the Central Tendencies for the PCE Deflator.