NYSE senior market strategist predicts limited policy shifts in Fed meeting

Kudlow says this ‘lethal’ combination could lead to higher inflation

FOX Business host Larry Kudlow discusses the rise of inflation and the Federal Reserve, arguing that Americans are still living in an ‘incentive-oriented economy.’

EXCLUSIVE: New York Stock Exchange senior market strategist Michael Reinking told FOX Business that he does not expect any major policy shifts during the Federal Reserve meeting this week, saying he expects a "tranquil taper" as opposed to the "taper tantrum" seen in 2013.

The Federal Open Market Committee began a two-day meeting Tuesday, and while the central bank is not expected to make any alterations to its policy, traders will be paying close attention to its language around inflation and when it may begin to taper its asset purchase program. 

MARKETS ARE LEAVING LITTLE ROOM FOR THE FED TO BE WRONG ON INFLATION

"After changing the Fed messaging earlier this year, the markets are drinking the transitory ‘Kool-Aid’ being served by the Fed," Reinking told FOX Business. "The meeting is going to be steady as she goes – I wouldn’t expect to see any major policy shifts, but we could see some technical adjustments." 

Reinking said from a broader market perspective, there is "still some angst within the market," saying it will be "interesting" to see how the market responds to the readout from the meeting of the Fed. 

Reinking pointed to the "phenomenon known as a Fed drift," which, he said, delivers a tendency for the markets to drift slightly higher ahead of a Fed meeting. 

"But no shift in messaging and tone is probably the best case scenario, with a slight acknowledgement of inflation data that we’ve seen recently," he said. 

Economists have suggested that the recent burst in inflation is transitory, due to an uptick in demand and the reopening of the economy as the coronavirus pandemic slows and restrictions are lifted in states across the country. 

Reinking said he expects Federal Reserve Chairman Jerome Powell to, for the first time, acknowledge that he has thought about "tapering the economy." 

"With the lead time, and the measured kind of communications thus far, I do think the market is potentially looking at a tranquil taper as opposed to the taper tantrum we saw in 2013," Reinking said, referring to when the Fed hinted it would reduce its bond purchases, triggering a minor panic in the financial markets. 

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"The last time around, we did see a sharp market sell off, but the Fed has learned from that lesson," Reinking said. "The communications are very different this time around – this, being the second time we’ve dealt with quantitative easing." 

Reinking added: "It is going to be very measured, and the Fed is communicating that to the market well in advance. The market was caught off guard in 2013, but this time around, there is lead time for the market to digest this." 

As for inflation, Reinking said the market is "trying to understand the data that we’re seeing," but said the areas to watch for "non transitory inflation, that could become a headwind going forward, will be wages and shelter." 

"I think the Fed would welcome wages moving higher, but if it moves to a point where it is pressuring company margin and increasing prices, that’s where it could get a little problematic," he said, adding that "another component we need to watch is shelter – rents, which accounts for about one-third of CPI data." 

"If we start to see that move higher, that becomes a much more sticky inflation," Reinking said. "Rents going up will take money out of the consumer pocket, so it is not necessarily a great thing for consumers, but as long as that stays, if you see that normalize, and start to increase in ways that wages are increasing, that’s not problematic – that’s where you start to see that weigh on the economy." 

Reinking predicted that there is a need for an increase in supply, which he said could lead to an increase in wages to "try to pull the labor force back into the market." 

"Some of the transitory effects that may be effecting the labor market are potentially going to ease over the next few months," he said, noting that the issue of child care could be solved when schools reopen in the fall. 

Meanwhile, Reinking said the summary of economic projections set to be released after the Fed meeting could drive some scrutiny. 

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"If we see the out years start to move, that could spook the market a bit, and would signal the Fed is moving away from their transitory messaging," Reinking said.

In the last meeting of the Fed, officials determined that an increase in interest rates would not be seen until 2024.

"If officials move to 2023, I would think that would be tolerated in the market," he said. "But if you start to see it moving into 2022, that’s an area where markets could get upset – and show the Fed signaling that they could be less accommodating, quicker."

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