FOMC preview: A placeholder meeting for Jackson Hole?
What to expect from the FOMC meeting decision later today?
No changes in terms of policy is expected, so without the accompaniment of updated projections i.e. the infamous "dot plots" among them, today's meeting decision will be all about scrutinising the language and the words offered up by Powell.
So, what are the key signs to look out for in that regard?
The two pivotal economic factors to be mindful about is the labour market and inflation.
The former has strengthened modestly while the latter continues to suggest that price pressures are coming in much hotter than anticipated.
Will that change anything in the Fed's view to the economic outlook?
I'd argue that is unlikely. If anything, the Fed is likely to balance out the former with risks associated with the COVID-19 situation. However, they are still surely going to retain a more bullish/upbeat view on the economy in order to set up taper discussions.
On the latter, even if inflation is to be more persistent and sticky than what 'transitory' is supposed to be, the Fed will continue to argue it to be a temporary issue and that remains key i.e. Fed's view on the issue is more important than the data.
They're not going to rile the market up with rate hike expectations just yet, especially not when the taper debate is not yet formalised and built into current pricing.
Putting all that aside, taper talk is arguably where the market will put hopes of any dovish or hawkish outcome when viewing this meeting and Powell's press conference.
The market isn't expecting any imminent talks of tapering but at least some signal of what could happen in the meetings to follow, especially on any potential policy change.
It is but a guess which side of the coin things will land later today but let's lay down the possibilities of each outcome.
If the Fed does acknowledge the start of taper discussions - most likely to begin at Jackson Hole next month - then the market may lean towards viewing this as a more hawkish signal. The dollar should rise modestly alongside yields but such moves should be relatively contained, especially in the bond market I would say.
I view this as a lower probability outcome though considering that the Fed will want to avoid a taper tantrum for as long as they can while maintaining some flexibility when going about their business in the next few months when sorting through the data.
On the flipside, if the Fed offers no hints of taper talk while preaching patience again, the market is likely to view that as being more dovish. The dollar may take a slight dent alongside yields but equities can take comfort in that in the short-term.
That said, watch out for any outsized bids in the bond market as that could trigger some risk aversion and provide a light safety net for the dollar.