The market expects the Federal Reserve to unveil plans today to end its bond purchases by mid-2022, while policymakers will also lean on what to do about inflation taking longer than expected.
U.S. central bankers signaled in the minutes of their Sept. 21-22 meeting that scaling back monthly asset purchases of $120 billion will be approved at this week's Federal Open Market Committee meeting. The consensus is to reduce purchases by $15 billion per month, starting in November or December, at a pace that would allow the program to end in June or July.
Fed officials are starting to see the risks
What may be more important now, however, is how the Fed revises other parts of its statement, particularly its description of inflation as largely reflecting transitory factors. Officials at the Fed appear to continue to largely maintain this view. They predict that by 2022, global supply constraints will have eased, pandemic-driven demand for goods among U.S. consumers will have cooled after massive spending on cars, motorcycles, and appliances, and enough people will want to return to work that the pace of wage and benefit growth will also have slowed.
In past weeks, however, Fed officials have acknowledged risks to that outlook. The jump in prices this year is already taking longer than expected, inflation is twice as high as the 2 percent target, and rising rents, low business inventories, and a large number of workers still waiting on the sidelines could mean that the high rate of price increases will continue for now.
Dollar not at risk?
Thus, the market is assuming the possibility of an interest rate hike as early as 2022, rather than 2023 as the Fed projections implied. The US dollar remains relatively strong and the EUR/USD exchange rate is above the 1.1500 level.
Traders in the FX options market, on the other hand, seem to be hedging against a possible USD strengthening tonight. Sentiment may therefore be more pro-dollar and only a very big disappointment from the Fed and Jerome Powell could change this and potentially weaken the dollar.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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