Today marks the end of the Federal Reserve's two-day interest rate meeting. Market expectations assume that the Fed will maintain the range for the federal funds rate at 0-0.25%, and bond purchases will continue at the current pace of USD 120 billion per month.
US policymakers at the two-day meeting likely discussed a possible reduction in stimulus. Details on this may not be revealed until the Jackson Hole symposium next month. Today's statement could sound more dovish than at previous meetings, as the spread of the delta variant of the coronavirus poses renewed risks to the economic outlook. Jerome Powell, head of the Federal Reserve, has, moreover, repeated several times that the goal of achieving full employment and price stability is still distant.
In June, the Fed kept rates and QE unchanged, but raised its expectations for inflation this year and pushed back the timing of the next interest rate hike.
If even this month the Fed were to consider tapering, i.e. reducing the scale of asset purchases from e.g. 120 billion per month to 100 billion per month, this would not necessarily mean a broad deterioration in market sentiment, especially in equities. The excess liquidity in the US seems to be almost USD 1 trillion per day, as shown by the Fed's sale of bonds under reverse repo operations. In other words, only getting rid of $1 trillion of excess liquidity and continuing monetary tightening in the US could have some impact on the markets.
From the point of view of the US dollar, which still remains relatively strong, the key level may be the area of 1.1750 in EUR/USD. According to the options market, a breach of this barrier could increase volatility, and thus declines and appreciation of the USD could be more rapid. This also applies to the other major currency pairs with the US dollar.
The Fed's decision and statement will be announced around 8 p.m., the press conference will start at 8:30 p.m.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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