US Federal Reserve Signals Bond Tapering this Year

In the recent monetary policy US Federal Reserve maintained its benchmark interest rate near zero but signaled that it would start reducing monetary stimulus to US economy later this year opening doors for early rate hike. Central bank said as US economy continues to gain strength it would start tapering its massive asset purchases and conclude by mid-2022 and half of its policymakers projected borrowing cost need to rise in 2022.

Know Why US Federal Reserve Signals Bond Tapering

Key Highlights:

US Federal Reserve maintained its target range for federal funds rate at 0 to 0.25%
Central bank will continue with its net purchases at a monthly pace of $120 billion, $80 billion of treasury securities and $40 billion of mortgage backed securities
Central Bank said if economy continues to show strength then they will start tapering asset purchases and conclude around the middle of next year
Central bank signaled interest rate increase may follow more quickly than expected
Out of 18 policymakers 9 ready to raise interest rates next year
Fed expects its inflation to remain elevated above its 2% target for 4 consecutive years

Guidance on Inflation and Economic activity:

US Federal Reserve Chairman Powell said indicators of economic activity and employment have continued to strengthen. In the first half of the year Real GDP grew by 6.4% and growth is widely expected to continue at strong pace in second half
Condition in labor market continued to improve, demand for labor is very strong and job gains averaged 750,000 per month over past 3 months
Inflation is elevated and will likely remain so in coming months before moderating. It expects price pressure to prevail as economy reopens and spending rebounds in coming months

Economic Projections:

US Federal Reserve in its economic projections revised lower its GDP growth outlook for 2021 to 5.9% compared to June estimate of 7.0%, while upgraded its growth forecast for coming years to 3.8% and 2.5% for 2022 and 2023 respectively
Bank revised higher its unemployment rate projection to 4.8% for 2021 compared to June estimate of 4.5%
Bank raised it inflation forecast to 4.2% for 2021 compared to June projection of 3.4%
Bank interest rate projections the so-called dot-plot showed that half of the officials expect interest rates need to rise at least 1 percentage point from their current level by the end of 2023

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Monetary Policy statements:

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals
With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. Inflation is elevated, largely reflecting transitory factors
The Committee decided to keep the target range for the federal funds rate at 0 to 0.25% and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time
Bank will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals
If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted

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Impact on Dollar Index:

Dollar Index may show some correction from its high of 93.50 in short term. However, in the medium term dollar will gain strength as US Federal Reserve signaled that bank will start tapering its $120B monthly bond purchases as soon as November and could raise interest rates sooner than expected. Out of 18 Fed officials 9 are ready to raise interest rates next year. Fed expects its inflation to remain elevated above its 2% target for 4 consecutive years. US Federal Reserve chairman said policymakers are in view that tapering could conclude around mid 2022. As long as Dollar index sustains above 93.50 it will open doors for 95/96 levels.

Disclaimer:

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