The US Federal Reserve maintained rates at 0-0.25% on Wednesday and announced a $15 billion/month reduction in asset purchases, to begin within this month - $10 billion will be Treasury securities and $5 billion will be mortgage backed securities. This tune would bring the asset purchases program to an end, at around mid-2022, in line with Fed officials prior commentary.
Central bank officials had done a good job in telegraphing their intentions well in advance and market turmoil was averted, although there was some pick up in volatility after the announcement and Mr Powell's press conference.
Despite the tightening of monetary policy, this was a largely dovish decision, as it gave markets the bear minimum of what they expected. Yes, the Fed did announce a QE tapering for November and December at the expected pace, but it did not commit for the rest of the horizon, saying that "The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook".
More to it, Chairman Powell commented that yesterday's decision "does not imply any direct signal regarding our interest rate policy", without pushing too hard against aggressive market expectations for rate hikes within the second half of the year – which is not contrarian to the Fed's own view and past experience that rate increases would begin after QE conclusion.
On the topic of high inflation it maintained its belief that this is transitory, but seems less adamant on this estimate lately and softened the relevant wording on the policy statement to: Inflation is elevated, largely reflecting actors that are expected to be transitory.
Given all this, the US Dollar dropped on Wednesday following the outcome of the meeting, but rebounds today, as the tightening process is expected to be supportive for the greenback, mostly against currencies such as the Euro and the AUD, as their central banks are still behind the Fed in that respect.
The decision was also dovish enough to not rattle the stock market, with the US Indices clinching fresh record highs and growth stocks, such as those of the technology sector, also moved higher.
Central banks stay in focus, as the Bank of England hands down its monetary policy decision today, with seemingly more unknown factors and potential for increased volatility.
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Senior Market Specialist
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
Retrieved 04 Nov 2021 https://www.federalreserve.gov/monetarypolicy/files/monetary20211103a1.pdf
Retrieved 04 Nov 2021 https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20211103.pdf