Will the Fed panic this week?

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Will the Fed panic this week? Panic tightening or panic easing? Neither in my view. It just needs to stay the course. Barclays thinks it will be dovish:

  • A number of factors are likely to lead the Fed to considerably improve its outlook for the US economy in March. These include:
  • Progress on vaccinations, case counts, hospitalizations, and death rates is likely satisfactory in the eyes of the Fed. Advances in controlling the pandemic was sufficient enough for the committee to shift the balance of risks in January to saying the pandemic posed down side risks to the near-term outlook, as opposed to the medium-term outlook previously. The committee is still likely to foresee a return to a more normal pattern of activity in mobility by the end of 2021.
  • Since the committee last submitted forecasts, in December, two large federal aid packages have been enacted. Although many FOMC members included some federal spending in their baseline outlook, we suspect it was not close to the $2.8trn in support passed. We expect the median member to forecast Q4/Q4 real GDP growth of 6.6% in 2021, 2.6% in 2022, and 1.8% in 2023. That said, we think the Fed is likely to see the economy as in a similar fundamental position at the end of 2023 as it did last December. Fiscal stimulus is likely to push the level of GDP higher in the short term relative to what the committee expected late last year, but subsequent growth rates will be slower as federal expenditures retrace, leaving economic fundamentals on broadly similar footing at the end of the forecast horizon vis-á-vis the Fed’sprior outlook.
  • Hence, we look for only a modest downward revision to the 2023 unemployment rate in the March SEPs and a one-tenth increase in the year-on-year rate of core PCE inflation, to2.1% from 2.0% previously. We still expect the median member to forecast no hikes through the Fed’s forecast horizon. Although recent communications suggest that participants are comfortable with some steepening of the yield curve in light of improved growth fundamentals, we doubt the committee will be eager to ratify expectations of an earlier lift-off.

But, Goldman is more hawkish:

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.