The Fed plans to taper asset purchases but it is unlikely to announce anything new in the July 2021 FOMC statement or during the press conference that follows.
The main event of the trading week is Wednesday’s FOMC statement and press conference. The Fed is expected to sit on its hands at this meeting, despite challenges to its tapering decision.
Although the Fed plans to taper its asset purchases, it is struggling to send the exact date to the market. Will the Covid-19 Delta variant affect economic growth, and will it be possible for the Fed to postpone its tapering decision? This is certainly one option as the pandemic is far from over.
On the other hand, higher inflation calls for the removal of accommodative measures as soon as possible. As part of the Fed’s forward guidance, the central bank will first announce the tapering and then act. The announcement did not come yet, and it is unlikely to come tomorrow either.
As seen in the chart, the market still expects early tightening. The Fed’s dot plot of interest rates has turned higher, albeit with a long way to go until it reaches the terminal rate estimate of 2.5%.
What to Expect From The Fed Tomorrow?
The rise in house prices rather than the economic impact of the Delta variant is more likely to keep the Fed awake at night. Concerns about financial conditions being too loose might become more important the pandemic concerns as the Fed cannot remain insensitive to rising prices.
At tomorrow’s press conference, the Fed will likely reiterate that it is actively considering the tapering of the asset purchases but that no decision has been made yet. A hawkish surprise might be if the Fed hints that the tapering announcement is on the cards at the next main event of the summer: the Jackson Hole Symposium due to take place in August.
The market expects the Fed to announce the tapering either at the September meeting or in December, and to start reducing the bond-buying from January next year. But tapering — which effectively is a slowing down of the asset purchases rate — is not the same as tightening. It is still easing, only at a slower pace.
Regardless of the announcement, the financial conditions in the US economy will remain loose until December 2023, when the first rate hike is priced in. As such, the risk-on environment in financial markets may continue unabated, as the Fed is likely to stay behind the curve intentionally.