Right here’s what the market needs — and doesn’t need — to listen to from Powell at this week’s Fed assembly

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You can’t blame Wall Street for introducing a bit of Hamlet to Jerome Powell at the Political Meeting of the Open Market Committee next week in June:

That is the question that the Fed’s rate-fixing committee will have to answer on Wednesday after the FOMC’s two-day session on financial markets closes.

Whether it is nobler to endure the slings and arrows of monstrous inflation or to take up arms against a sea of ​​unrest, as Hamlet might have said had he been the central bank governor.

Obviously, nobody expects fireworks at this upcoming meeting, but it could nonetheless prove to be the linchpin for stocks and bonds.

This is especially true for the S&P 500 Index SPX, + 0.19%,
the Dow Jones Industrial Average DJIA, + 0.04%,
and the Nasdaq Composite Index COMP, + 0.35%,
Float at or near record closing highs.

The Fed meeting comes amid increasing signs that price pressures are building in the economy as it recovers from last year’s COVID pandemic and the introduction of vaccinations allows companies to return to some semblance of normalcy .

The U.S. Department of Labor’s consumer price index report last Thursday showed the cost of living skyrocketed in May, propelling inflation to a 13-year high of 5%, reflecting a broad price hike Americans are facing.

Read: An inflation storm hits the US real estate market

“The critical question now is whether this increased inflation rate is ‘temporary’ or whether higher prices risk becoming psychologically entrenched,” wrote Matt Weller, Forex.com’s global head of market research, in a research note on Friday.

The bond market may already have been dealing with inflation, with yields on 10-year government bond BX: TMUBMUSD10Y and 30-year government bond BX: TMUBMUSD10Y at their lowest levels since at least early March.

Treasury and equity investors see the spike in inflation being fueled by biases in the supply chain as consumers spend money after the pandemic, along with statistical base effects as last year’s falling prices drop out of annual calculations and are therefore likely to be volatile.

However, is it not exactly clear what ephemeral means – months, years? How long must increased inflation be tolerated before market participants and the Fed lose patience when inflation erodes asset prices?

“Through the end of 2021 and 2022, policy makers continue to expect inflation to return towards their 2% target is a message the committee is likely to repeat at next week’s meeting,” wrote Lindsey Piegza. Chief economist at Stifel in a Friday note.

“Nevertheless, the US economy is picking up speed and the job market is creating more than 500,000 jobs a month. Therefore, while neither policy adjustments nor an announcement of a schedule for an eventual policy adjustment are expected in June, at least some Fed members are expected to push for discussion on a possible withdrawal of the contingency measures in the coming months, “she said said.

Some traders, analysts, and economists are betting that the Fed will aim to articulate the view that the reduction in its $ 120 billion monthly asset purchase, carried out during the worst part of the pandemic, is near the end Will begin in 2021.

The Fed could talk about tapering in June and start working on a rollback in August or September.

With inflation soaring, timing seems difficult for the Federal Reserve to slow down as the labor market rebound still looks shaky relative to labor demand and is reflected in the weaker-than-expected nonfarm in May, pay slips and job postings from last week, which hit a record 9.3 million.

Lawrence Gillum, fixed income strategist at LPL Financial, said the market primarily wants the timing of the Fed’s throttling. He also pointed out that reducing the central bank’s $ 40 billion in mortgage-backed securities in particular will be important as the real estate market is widely viewed as being overheated.

“The main thing we’d love to hear next week is how and when the Fed plans to cut its bond-buying programs,” said Gillum.

“Also, why the Fed continues to buy $ 40 billion worth of mortgage paper every month when the real estate market definitely doesn’t need that support. Are we going to get this clarity? Probably not, ”he offered.

Andrew Hunter, chief US economist at Capital Economics, said in a report Friday that, in this regard, he still expects policymakers to take a slow approach to reducing monetary accommodation.

“While we suspect that at next week’s FOMC meeting, Fed officials may finally begin tapering their bond purchases, they are likely to stress that the economy is still a long way from making“ substantial further progress ”toward its goals do. ”he said.

In fact, Peter Essele, head of investment management for the Commonwealth Financial Network, said the market may need to hear more reluctance from Fed officials as they circumvent the notion of scaling back easy money policies.

“Market participants are clearly expecting a cautious tone from the Fed next week, as the latest interest rate shows,” Essele told MarketWatch in an email comment.

“We expect the Fed to stay on the accommodative pedal next week, which will not change until inflation is no longer temporary and the economy returns to full employment,” said Essele.

“Until then, government bond rates should stay in a range at the long end and anchored at the short end so that bond investors have little reason to worry in the short term,” he said.

What Else is on Investor Radar?

The only other major item on the agenda for next week is U.S. retail sales in May on Tuesday as investors continue to watch negotiations between the Biden administration and Republicans over an infrastructure spending plan as it impacts economic growth and the bond.

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