The Federal Open Market Committee (FOMC) will release its latest interest rate policy at 2 pm ET today. The announcement will be followed by a press conference with Fed Chair Jerome Powell.
While the Fed has been beating back worries about inflation by claiming that the pressure is 'transitory' and will relent once the economy returns to normal, there are concerns that the pressure on prices will continue and that the Fed will need to taper sooner rather than later.
So far the bond market has been relatively sanguine about the issue and the indices are hovering around all-time highs, but the action on Tuesday demonstrated some nervousness about the inflation and taper issues as there was rotation out of growth and speculative stocks again.
On Tuesday morning, the PPI reading came in higher than expected, but retail sales missed estimates, and that helped to alleviate some of the concerns, but wide-spread shortages and a huge amount of unfilled job openings are increasing pricing pressures, and there is concern that it isn't temporary.
The question that market participants face today is whether the Fed is going to acknowledge that inflationary pressures are not quite as temporary as they have been promoting. Regardless of the inflation readings, the Fed will need to start tapering its massive balance sheet sooner or later. It has already indicated that it will start to unwind some of the bond-buying that it did during the pandemic.
Not only do we have the question of what the Fed might do and say today, but the more important issue is whether the market will use the news for some corrective and rotational action or will it continue to shrug off this worry. The market has been doing a good job of embracing the idea that inflation is transitory, but it has suffered some periodic bouts of concern. The narrative is not taking hold, and bonds have been sending a message that there is no major concern.
Market action should be mixed until the Fed announcement, and then we will dance around as the news is digested. The market has a general inclination to react favorably to the Fed, and Jerome Powell has become quite adept at giving market participants what they want, but there is some risk that the wrong word or tone of voice will cause a market reaction.
Stay patient, and we will see how things develop when the news hits this afternoon.