Fed Watch: When Doves Cry

Head of Fixed Income Strategy
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Ok, after reading the July FOMC policy statement and then listening to Chairman Powell’s follow-up presser, I came to one conclusion: Powell wants it both ways. 

Here’s what I mean:

  • The July FOMC policy statement read a bit more hawkish than one might have expected. It acknowledged that, "with progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen"—while also stating that "the path of the economy continues to depend on the course of the virus."
  • Number 1: There is no mention of the delta variant!
  • Number 2: The Fed acknowledged that, in terms of reaching their economic and price stability goals, the economy has made progress.
  • That is Fed speak for “the tapering discussion has begun in a more earnest fashion,” a point Powell reiterated in his presser.
  • At that presser, Powell did mention 1) delta as a potential economic impact BUT then went on to say, he’s “seen fewer economic implications from each virus wave,” 2) the FOMC discussed “considerations on bond buying” BUT “we’re some ways away from progress on jobs” and “clearly a ways away from raising interest rates,” 3) he still sees inflation as transitory BUT it’s “possible inflation will be higher and more persistent than expected.”

Got all that? That’s what I meant in my opening statement.

BOTTOM LINE: The Fed is on target to announce a more formal tapering announcement perhaps at their September 22 meeting, and the markets will be watching Powell’s expected Jackson Hole appearance (August 26–28) for any clues as to what may be coming. Also, at the September FOMC meeting, the Fed’s updated blue dots (Fed Funds estimates) are due…I’ll be watching very closely to see if the current 2023 rate hike ‘lift off’ is adjusted toward 2022.

In the meantime, most analysis that I’ve seen shows the U.S. 10-Year Treasury yield is still below fair value, with a reading between 1.50% and 1.60% appearing to reflect a better  equilibrium level.

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About the Contributor
Head of Fixed Income Strategy
Follow Kevin Flanagan
As part of WisdomTree’s Investment Strategy group, Kevin serves as Head of Fixed Income Strategy. In this role, he contributes to the asset allocation team, writes fixed income-related content and travels with the sales team, conducting client-facing meetings and providing expertise on WisdomTree’s existing and future bond ETFs. In addition, Kevin works closely with the fixed income team. Prior to joining WisdomTree, Kevin spent 30 years at Morgan Stanley, where he was Managing Director and Chief Fixed Income Strategist for Wealth Management. He was responsible for tactical and strategic recommendations and created asset allocation models for fixed income securities. He was a contributor to the Morgan Stanley Wealth Management Global Investment Committee, primary author of Morgan Stanley Wealth Management’s monthly and weekly fixed income publications, and collaborated with the firm’s Research and Consulting Group Divisions to build ETF and fund manager asset allocation models. Kevin has an MBA from Pace University’s Lubin Graduate School of Business, and a B.S in Finance from Fairfield University.