| Decision day at the Fed, semiconductor shortage gets serious, and the world has changed for oil. Dots While there is almost zero chance the Federal Reserve will announce any change to interest rates or the pace of asset purchases today, there still is plenty for markets to look forward to when the decision is announced at 2:00 p.m. Eastern Time. The main area of focus will be the updated economic forecasts, with economists looking for changes in the so-called dot plot for hints as to when policymakers see a liftoff from near-zero rates. In his press conference Chair Jerome Powell may comment on recent Treasury volatility, while defending the bank's ultra-easy monetary policy amid a quickening economic recovery. Shortage The global shortage of semiconductors is starting to have serious effects for automakers, with Honda Motor Co. saying it will suspend production at some U.S. plants while Toyota Motor Corp. has already scaled back production due to the lack of chips. Industry leaders told a Senate committee yesterday that more incentives are needed for domestic production to reduce the reliance on foreign supplies of semiconductors. Samsung Electronics Co. warned that the supply crunch may delay the launch of its latest phone while Volkswagen AG said it has lost production of 100,000 cars worldwide. There is little good news on the immediate horizon, with Renesas Electronics Corp.'s top executive warning the shortage may last into the second half of this year. New normal The International Energy Agency's latest report makes grim reading for any oil bulls looking for a return to the pre-pandemic landscape for crude demand. While the agency said consumption would return to 2019 levels by 2023, it warned that the growth trajectory from there will never return to old levels. It also said that gasoline demand may have already peaked, and that the recovery in U.S. shale production will only be marginal this year. In the market, oil reversed early session gains after the report was published, with a barrel of West Texas Intermediate for April delivery trading at $64.68 by 5:50 a.m. Markets quietGlobal equity investors are taking a bit of a breather ahead of today's Fed decision, with indexes easing back from recent gains. Overnight the MSCI Asia Pacific Index slipped 0.3% while Japan's Topix index closed with a 0.1% gain. In Europe, the Stoxx 600 Index was 0.3% lower at 5:50 a.m. with miners and retailers leading the pullback. S&P 500 futures also pointed to a small loss at the open, the 10-year Treasury yield was at 1.646% and gold gained. Coming up... February U.S. housing starts and building permits data is at 8:30 a.m. Canadian CPI for the month is also at that time. The House Financial Services Committee hearing on retail investing starts at 10:00 a.m. The latest U.S. crude inventories report is at 10:30 a.m. Brazil's central bank announces its latest rate decision at 5:30 p.m. The Bloomberg Equality Summit continues. What we've been readingHere's what caught our eye over the last 24 hours. And finally, here's what Joe's interested in this morningIt's Fed day. Given the macro picture has brightened so much in the last few months, thanks to stimulus and reopening optimism, and since yields have risen fairly dramatically, it's one of the most anticipated meetings in recent times.
Here's two paragraphs to help think about the challenge for Powell & Co. today.
First, here's Conor Sen in Bloomberg Opinion, explaining that for the Fed to truly stick with its dovish message, it also needs to be optimistic.
...the Fed should be every bit as optimistic about growth as the market has been, while still sticking to its script on the timing of any rate increase. Only by meeting or exceeding the optimism of investors while retaining its current policy stance can Powell persuade investors that he's determined to let the economy run hot in order to achieve the Fed's objectives.
In other words, it's one thing to say "the economy is just so so, and so we're not going to raise rates until 2023 or beyond", but if you really want to demonstrate your mettle to the bond market, it's way more powerful to say: "The economy is going to boom in 2021 and maybe even 2022, but we're still not going to raise rates until 2023 or beyond."
Meanwhile, there will be a lot of focus on Powell's press conference, and whether he "pushes back" at all at the rise in rates. When given the opportunity a few weeks ago during an interview with the WSJ, he didn't give any inclination to talk down rates, let alone introduce new rate suppressing policies. That being said, the Fed does have subtle communication tools it can use to indicate to the market just how long it will be before it plans to hike rates.
In a recent Q&A here on central bank challenges, Jon Turek of the Cheap Convexity newsletter explained:
The problem the Fed and other central banks have had recently is markets are discounting their thresholds, especially for tapering asset purchases, which is so crucial in a sequencing sense. So I expect to see more language like we saw last week from the Fed, that pushes back and adds qualifiers to "substantial progress." I.e. Last week we heard Brainard talk about "maximum inclusive employment", and Clarida talk about looking past just U3 to define "substantial progress." This is how the Fed gets back onside with the market, because the market is looking at Goldman's call for a 4 handle U3 by year-end and saying that should equal "substantial progress" and now the Fed is saying, well, maybe not. That is important language that I think has been a bit overlooked recently by the market. Basically, by emphasizing how far the economy still is from full employment, beyond just the headline U3 measure, Powell can drive home how patient the Fed is willing to be, even against the backdrop of nominal improvements. So there you have it. Watch to see if the Fed is willing to demonstrate its dovishness by getting more bullish on the short-term GDP trajectory. And listen to see the degree to which Powell emphasizes how much work is yet to be done in the labor market to truly bring the benefits of a strong economy to everyone. Joe Weisenthal is an editor at Bloomberg. Something new we think you'd like: We're launching a newsletter about the future of cars, written by Bloomberg reporters around the world. Be one of the first to sign up to get it in your inbox soon. | 
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