Monex: Fed not expected to announce the beginning of its QE tapering

Monex: Fed not expected to announce the beginning of its QE tapering

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This is a preview by Ima Sammani, FX Market Analyst at Monex Europe, of the Fed's decision concerning interest rates next Wednesday.

While we don’t expect the Fed to announce the beginning of its QE tapering in September, which has been a long-held view that was compounded by August's payrolls, the latest Summary of Economic Projections will be key for market pricing.

Alongside the Fed’s GDP and inflation projections are their interest rate projections, which could see Fed officials form a consensus around a 2022 hike, while the latest dot plot will also include 2024 projections for the first time.

Only 2 FOMC members would need to shift their views from holding rates in 2022 to favour a 25bps hike for the median consensus to shift upwards, which would support higher front-end yields and the dollar.

The focus won’t just be on the median lift-off projection though. The inclusion of 2024 interest rate projections also means markets will get a clearer view of how steep the Fed’s hiking cycle is expected to be given their economic projections, which could play out in the belly of the curve.

Hawkish messaging from Fed officials via the dot plot is likely to support the dollar in the initial aftermath, however, it must be noted that Chair Powell dampened the hawkish tone the last time the Fed updated their dot plot - this dynamic could play out again.

Over the medium-term, we don’t expect a marginally more hawkish dot plot to change our structurally bearish view on the US dollar, however, our expectation of cyclical downside in the greenback could be moderated should Fed officials substantially raise their implied rate path.