FED: Time to taper, but it is not time to raise rates.
The Federal Reserve (FED) will hold its press conference on November 3. The Federal Open Market Committee (FOMC) is expected to announce the gradual tapering of its asset purchases. We expect Fed Chair Powell to adopt a balanced communication strategy by reaffirming the dovish forward guidance on rates.
Please find below what we expect:
- The FOMC will likely announce a gradual tapering at a monthly pace of $10bn for treasury securities and $5bn for agency mortgage-backed securities beginning in mid-November. This would mean that Quantitative Easing would finish in June 2022.
- The Fed will maintain its policy of reinvesting principal payments on its holdings.
- The FOMC will keep some flexibility to adjust the pace of asset purchases depending on upcoming employment and inflation data. Fed Chair Powell will emphasize that the Committee could act if higher-than expected inflation were to persist for an extended period.
- The central bank will make some substantial changes to its policy statement to warrant the decision to taper asset purchases.
- We do not believe the FOMC will change the characterization of inflation i.e., “Inflation is elevated, largely reflecting transitory factors”. But Jerome Powell will likely highlight that the Committee will monitor incoming data carefully, namely the risk on the de-anchoring of inflation expectations.
- Obviously, the FED will keep the federal funds target range steady at 0-0.25%.
The main risk, from the hawkish side, would be signs that Jerome Powell is less convinced than before by the temporary inflation narrative. This meeting may lead to a flattening of the US treasury yield (UST) curve.
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