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What to expect from Fed decision this week

Yahoo Finance’s Myles Udland, Julie Hyman, and Brian Sozzi discuss what to expect from the Fed this week, and preview May retail sales.

Video Transcript

MYLES UDLAND: I think you know, Sozzi, we're going to get some economic projections from the Fed, which are always fun. And I'll be interested to see-- and I know you will as well-- to see how they change their outlook on inflation, if at all, if we start to see some upgrades from Fed officials on where they think prices will go this year.

And then as a consequence, will we see any change in the dot plot? Because right now, there's really no projected rate hikes until 2023, even though the market believes second half of next year that's going to be a more material conversation.

BRIAN SOZZI: No, and really, Myles, I think you hit the nail on the head here. That is the most talked-about thing-- at least in the lead-up to this FOMC meeting-- Do they-- do the Fed officials raise their inflation projections? Because of course, if they do that out to 2023, investors may take that as, you know what? Wow, OK, interest rates may be coming perhaps a little quicker than we think.

And let's keep in mind here, Julie, too, so far, this market very much believes what the Fed has been selling in terms of inflation being transitory. You have the 10-year yield at a three-month low, and you have the market ripping higher as a result of that. So the market has put its trust in the Fed that it knows what it's doing, and they can handle this inflation.

JULIE HYMAN: You know, it's interesting, though. Apparently, there are a number of strategists on Wall Street saying that this run in treasuries has gone too far. They're recommending shorting, at least, the latest move in the treasuries-- in other words, shorting the price. They're betting the yield's going to move higher. That's-- JP Morgan's recommending that, TD Securities' recommending that.

And then Citigroup economists are out with a note as well talking about those inflation projections, saying that they could be revised up, "substantially for this year, and probably nudged higher for 2022." So definitely, Myles, to your point, there's going to be a lot of attention paid to those inflation projections and how they're going to change.

And it's interesting that we're now hearing some murmurings from Wall Street that we could see them nudged more substantially to the upside. It certainly doesn't feel like the market is setting up for that.

MYLES UDLAND: Yeah, and just to put some numbers on that, and I will mention it later this week. So class, if your eyes glaze over, don't worry too much about this one. But core PCE inflation expected to be 2.2% in 2021, according to the Fed's latest projections, as of March, 2.4% on headline inflation-- that was the 5% number that we got last month for 2021. Both of those were revised up from 1.8% forecasts for both headline and core inflation in 2021 as of December last year.

So we'll now get a six-month from that point update from the Fed likely again, as we mentioned, to be some upgrades to that forecast. Whether it feeds through to where the Fed funds rate is likely to go remains to be seen. Because again, the central tendency-- as the Fed calls it, basically-- where they think things are going to be based on the plurality of members, that middle part of the group-- not expecting any rate hikes in 2022.

Do also want to note, and Sozzi, 30 seconds, your thoughts on this one. Retail sales tomorrow. We also get producer prices, which nice hipster data, I know, Julie Hyman will be telling us tomorrow morning that's the real data to pay attention to. Any thoughts on the consumer ahead of that number?

BRIAN SOZZI: Yeah, I would be surprised if you do not see really strong upside versus estimates on retail sales. I think the Street-- whether it's economists, whether it's a sell-side analysts covering the retail space-- continue to underestimate how much consumers are spending. Look at the earnings results we have had over the past three weeks from Academy Sports.

We talked to Ken Hicks last week, said he can't even keep enough inventory in its stores. Dick's Sporting Goods blew it away, golf section, apparel section. I talked to Foot Locker's CEO a couple of weeks ago. They're selling out of footwear. So, I mean, the consumer's out there spending in a big way.

MYLES UDLAND: All right, we'll again, have that data 8:30 tomorrow morning, retail sales set to hit the--