The main event of the trading week is the FOMC September meeting. Market participants expect the Fed to announce the tapering of its Quantitative Easing (QE) purchases starting with November. All eyes are on the dot plot.
Financial markets may have had a rough start this week due to troubles in the Chinese real estate market, but the main event of the trading week lies ahead. Tomorrow, the Federal Open Market Committee (FOMC) is expected to signal the beginning of its QE tapering starting in November.
Quantitative Easing or QE is an unconventional monetary policy used by central banks, including the Fed, to combat economic recessions. Simply put, the Fed buys U.S. government bonds with newly printed money. During the COVID-19 pandemic, the Fed also included corporate bonds.
The decision was well-telegraphed before, and the Fed will not risk upsetting the markets, especially since the Fed Chair, Jerome Powell, seeks re-election. While the tapering is, more or less, priced in, a surprise may come from the dot plot.
What Is the Dot Plot and How It May Affect the U.S. Dollar?
The first thing that will impact financial markets regarding Wednesday’s decision is the FOMC statement. It will likely contain the QE tapering decision. During the press conference, the Fed Chair will read the monetary policy statement and reveal the Fed’s staff economic projections.
Also, the dot plot is revealed, and this is the part that might surprise the markets. The dot plot shows projections for the federal funds rate, and each dot represents the view of one policymaker. Investors focus on projections in the years ahead and the timing of the first-rate hike/hikes. A change in the federal funds rate affects consumer loan rates and saving yields; thus, it substantially impacts the U.S. dollar and financial markets’ volatility.
The risk at tomorrow’s meeting is that the dot plot shows an earlier rate liftoff than the market participants expect. Should that be the case, it will trigger renewed U.S. dollar strength.