What to Watch This Week: Key economic data releases await in the days ahead, specifically the durable goods report (Wednesday), Q4 GDP and jobless claims (Thursday), and PCE inflation, employment cost index and consumer sentiment (Friday). All told, we expect the summation of the data will show a more vigorous finish to 2020, and one that will largely translate into greater economic momentum at the start of 2021, particularly now that the $900 billion of fiscal stimulus passed in late December will ultimately bolster the spending power of hard hit low and middle-income households.

What’s the fly in the chardonnay? The potential that the tenuous signs of improving public health, such as falling hospitalization rates, will be upended by new, more contagious variants of Covid-19, which could lead to stricter lockdown measures and downgraded economic projections. Additionally, the slow pace of the vaccine rollout could become even slower, or the multiple vaccines end up being much less effective at slowing the spread of the virus than hoped for.

Key events this week: the Fed meets for its first monetary policy meeting of the year on Tuesday and Wednesday.  No one expects the Fed to change its interest-rate policy nor the pace of asset purchases.

We’ll be focused on the Fed’s economic assessment and the tone of Chair Powell’s press conference (both on Wednesday), where we expect the Fed Chair to continue to squash speculation that the Fed is having internal discussions on tapering its bond purchases later this year (if you’re not aware, the central bank is buying around $80 billion a month in Treasuries along with $40 billion in mortgage-backed securities in an effort to keep interest rates low). If we don’t hear the same echo of denial from the Fed Chair that he’s stated recently, we could see a selloff in longer-dated U.S. government debt, pushing long-term rates higher and steepening the Treasury yield curve. With this much easy money sloshing around the economy, markets fear a second recurrence of 2013’s taper tantrum, when former Fed Chairman Ben Bernanke’s hint of an early paring of Fed bond purchases jolted long-term yields unexpectedly.

Curious on where rates are headed through all of 2021 and why? Check out our 2021 Interest Rate Outlook.

Big Picture: The 10-year Treasury yield is close to re-testing 10-month highs amid a brighter growth outlook and expectations for additional virus-relief aid from Congress. The 10-year yield previously reached a 10-month high of 1.186% on January 12, the highest level since March, after some regional Fed presidents indicated they are open to paring the Fed’s bond purchases – aka “tapering” – this year. The 10-year yield has since drifted lower after Fed Chair Powell beat back tapering speculation in recent public comments.

While exciting to think about, we doubt we’ll see another taper tantrum. The passage of the $900 billion fiscal stimulus package since the Fed’s last meeting in December has likely bolstered the Fed’s confidence that the economy won’t backslide into recession, even though the jobs market – the Fed’s top priority – deteriorated recently. Even so, while striking an optimistic pose, Chair Powell will intentionally fall far short of hinting that a shift in the Fed’s easy money stance will be considered anytime soon and is more likely to state that the Fed stands ready to do even more to stimulate growth if necessary – the exact opposite of tapering. We don’t expect to see any real change in the Fed’s growth-stoking stance until mid-2021 at soonest, and even then, it will be telegraphed with great nuance ahead of time so as to avoid any negative market reaction.

Current Select Interest Rates:

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Source: Bloomberg Professional

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Source: Bloomberg Professional