The Fed announcement today was not surprising as to policy: no change in the overnight interest rate and monthly bond purchases will continue. As prices rise (whether transitory or not), inflation is becoming a political issue. Many lawmakers and influential economists are calling for a reduction in bond purchases. Today, Fed Chair Powell continued to stand firm. He emphasized that the ultra accommodative policies will stay in place until full employment: the bond purchases will be maintained until they have achieved “substantial further progress” in the job market. Today’s meeting and announcement basically push off any rate increases until late 2022 or early 2023. Powell again promised to warn markets in advance of any “tapering” of bond purchases. Assuming the warning comes in August/September, that would put the beginning of any tapering at year end. With $120 billion in monthly bond purchases, an orderly non-disruptive wind down would take 12 months, lowering purchases by $10 billion per month. The 10 year T yield ended the day at 1.23%, down 2 bps from this morning.
Congress in the mix: Today’s announcement of an agreement on a bipartisan infrastructure plan will increase stimulus over the next few years. More pressing is the Debt Ceiling deadline. The US ability to borrow above its present levels expires this weekend. The Treasury will use the now usual “extraordinary measures” to keep the government from defaulting for the next few months. This will affect the supply of treasuries and these technical factors may further keep yields low, until buyers feel that there is a real danger of default. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners