Our take on the Fed’s June meeting

The US Fed is meeting today, and most investors are keen to hear the FOMC’s take on the latest spurts in inflation and its assessment of the US recovery. While we expect no major change in the current monetary policy, we will closely watch the wording of the statement to gauge the Fed’s conviction on its transitory inflation view. We also expect the Fed to guide when it will start tapering its asset purchases.

 

In addition to inflation numbers which we looked at in our previous snippet, the Fed will also analyse the job prints. The May print came in at 559,000 jobs cutting the largest economy’s unemployment rate to 5.8% from 6.1%. The print is encouraging as it gives us a snapshot of the pace and quality of recovery in the US economy. It also suggests a Goldilocks economy if one strips off transitory factors. But the Fed will have to deal with an emerging problem: labour shortages causing labour market tightness. The skewed incentives created by fiscal stimulus cheques have discouraged job seekers and employers are currently forced to bid higher for talent. The pandemic has certainly impeded the ability to work as well as significantly deterred labour force participation, as illustrated in the graph below, currently at historical lows. Should the tightness in the labour market continue, it could cause wage inflation pressures. There is hope though that this will be resolved as stimulus cheques are phased out starting from September.

 

Overall, we do not see the Fed making any significant changes to its policy in today’s meeting. We expect interest rates in the short-term to remain accommodative, while US labour dynamics improve. The prevailing easy monetary policy stance should bode well for risk assets, especially emerging markets where there is plenty of value.