MBS Live Day Ahead: Fed Day! What's at Stake? (Hypothetical Dot Plot Included)

There are 8 Fed announcements per year (barring emergencies).  Today's announcement is one of the 4 that include updated economic projections (the "dots" are part of that).  While the Fed downplays the dots, markets tend to have more volatile reactions.  Major policy decisions are definitely on hold for now, so markets will be left to read the tea leaves from minor verbiage changes in the announcement, Powell's press conference, and of course, the dots. 

The net effect could certainly be relevant, with a move back up toward the previous range (red lines in chart below), or an extension of the recent run toward early 2021's low yields (green lines in the chart).  To be clear, today would only be the catalyst for beginning of such moves.  There are only 3 hours of trading following the Fed today, and we're talking about setting trends for the rest of the summer. 

What to expect:

• The dots will show ongoing migration toward higher policy rates--not in 2021, but a few more dots may move up into the 0.375-0.875 range for 2022.  Even more "lift-off" should be seen in 2023.  The "long run" should be little-changed, with only a few of the dots moving up by 0.25-0.375 
  
  
• Powell will be asked about tapering.  He will be willing to talk about talking about it "later this year" and could go so far as to say "in the coming meetings."  If so, he will be careful to clarify that no decision will be made until "this fall," or something that conveys a similar timeline.  Markets may balk at that, a bit, but should ultimately settle down.
  
  
• Powell MIGHT be asked about MBS vs TSYs specifically.  Last time he said "we're watching."  He might say a bit more about concerns regarding home values, but if he's smart, should ultimately deflect to the broader issues of supply/demand of homes.  The baseline assumption is that the Fed's MBS purchases are relatively insignificant compared to the supply/demand issue--assuming, of course, that the Fed would continue buying Treasuries if they weren't buying as much MBS
  
  
• Powell will certainly be asked about recent upticks in inflation.  He will likely do a good job of framing those as exactly the sort of temporary distortions the Fed expected.
  
  
• In all cases, we expect him to reiterate that policy decisions will require the more robust economic information the Fed expects to receive "this fall."  He is likely to acknowledge progress on several fronts, and to express reservations about the pace and uncertainty of the labor market improvement.  He is unlikely to express much--if any--concern over inflation, and continue leaning on the notion that the Fed has tools to address it if it proves to be more than transitory.  
  
  
• On an arcane sidenote, the Fed may tweak its "administered rates," (reverse repurchase rate, IOER).  These will confuse people, but they are mere housekeeping changes and not the sign of any meaningful policy shift.