Under Chair Jerome Powell’s leadership, the Federal Reserve (Fed) has provided a clear and consistent message since the onset of the pandemic, saying that “the path of the economy will depend significantly on the course of the virus.” The recent spread of the highly contagious coronavirus Delta variant and its impact on the global economic recovery will likely move to center stage at next week’s Federal Open Market Committee (FOMC) meeting.
The great inflation debate (is the recent inflation spike transitory or persistent?) will remain a focus for policymakers, especially in light of the hotter-than-expected June consumer and producer price index reports. However, certain market-based measures of future inflation — including lower commodity prices, recent strength in the U.S. dollar and rapidly falling Treasury yields — are pointing towards an easing of price pressures ahead. Chair Powell is unlikely to deviate from his transitory inflation argument.
At last month’s FOMC meeting, Fed policymakers delivered a “hawkish” surprise to investors — starting the discussion on winding down its bond purchases and moving forward the timeline for liftoff from zero rates. I expect next week’s FOMC communication to pivot back towards a more “dovish” bias as renewed COVID fears pose emerging risks to the global growth outlook.
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