Fed Decision: Five things to watch – Nordea

“The Fed meeting tonight will likely not lead to a decision on tapering, but a lot of technical issues are on the table, which makes the meeting super interesting anyway. Here is what to watch,” notes Andreas Steno Larsen, Chief Global FX/FI Strategist at Nordea.

Key quotes

“On USD liquidity: Liquidity has already effectively peaked as the 5 bps hike to the ON RRP facility incentivized further usage of the facility. We may be in for an additional 200bn USD in liquidity added from the drawdown of the TGA (US Treasury is forced to spend cash from the liquidity buffer due to the debt ceiling) just this week.”

“On the Fed funds rate: The effective fed funds rate prints at 10 bps, which is still 2.5 bps below the mid-point, so there is absolutely no reason to think that the Fed regrets hiking the ON RPP and IOER rates by 5 bps before summer.”

“On QE: The Fed has recently started “stealth-twisting” it’s QE program with an increasing WAM of the SOMA-portfolio. The increasing WAM of the SOMA-portfolio could be an early sign that the Fed intends to maturity-sugarcoat a tapering process that arrives EARLIER than anticipated.”

“On inflation: It is still fairly easy for Powell to explain most of the recent inflation surge away as transitory since it is driven by only a few components such as used cars (due to chip shortage), transport costs (a re-opening base-effect) and energy prices. Expect the word "bottle-neck" to be used a lot tonight.”

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