The Fed didn’t release a tapering announcement at yesterday’s FOMC statement and press conference. The pressure mounts for the slowing down of asset purchases to be announced at the upcoming meetings.
The main event of the trading week brought some clarity to financial markets participants. The Federal Reserve of the United States (Fed) did not announce the tapering of the asset purchases, but it let markets believe that it will do so soon.
Prior to the FOMC (Federal Open Market Committee) statement and press conference, the markets moved in tight ranges. All markets – equities, currencies, bonds, commodities – waited for the Fed, holding the levels from last Friday. In other words, the first two trading days of the week brought nothing important enough to move the markets.
Even ahead of the statement and press conference, the risks were skewed hawkish. Many voices said that it is time for the Fed to end the Quantitative Easing (QE) program.
The argument, a strong one, was that the liquidity provided by buying $120 billion worth of bonds per month is just recirculating back to the Fed via the ON RRP (overnight reverse repurchase agreement). In the last weeks or so, the bonds bought via QE were sold back via ON RRP, cancelling the liquidity effect.
So, where is the stimulus, and why the need for more? Below is a scenario proposed by Nordea, an investment bank, regarding a possible schedule for the Fed’s tapering process – a taper decision in September, a slow-down in December, and a complete unwind by the summer of 2022.
What Did the Fed Say?
The Fed kept the pace of the QE unchanged in July – it will keep buying $80 billion worth of Treasuries and $40 billion MBS (Mortgage-Backed Securities) per month. Moreover, it kept the discount rate unchanged at 0.25% and vowed to further assess progress on goals over the coming meetings.
It’s important to notice that the Fed mentioned several meetings. In other words, the Fed did not hint at the September meeting to be the one for the tapering announcement, so the US dollar traded with an offered tone immediately after the statement’s release.
However, yesterday, the Fed gave its first hint to the markets that it is getting closer to slowing the pace of its asset purchases. More precisely, it acknowledged the fact that the US economy made progress toward its goals of full employment and an average of 2% inflation.
All in all, it may be considered a mixed message. As a result, summer trading ranges are likely to stay in place in the upcoming weeks.