A multi-leg spread on natural gas
15 September 2021
Dollar analysis after the Fed meeting
27 September 2021
Federal Reserve gave several indications at yesterday's meeting. For the time being, the monetary policy remains accommodative, keeping bond purchases at 120 billion a month, but tapering is just around the corner. A precise date has not been set, but it could begin after the FOMC meeting on 2-3 November, provided that US employment growth through September is “reasonably strong”.
Thus, the next Non-Farm Payrolls report due out on 8 October (for the month of September) will be even more important than usual, being the last one before the FOMC meeting on 2-3 November.
"It wouldn't take a knockout or super-strong employment report," to start the "tapering of the bond-buying program, with the process expected to wind down by the middle of next year," Powell said. And this comes as a surprise since it was initially planned until December 2022.
What did not surprise me (and did not surprise the markets either), is that the Fed now plans to raise rates as early as next year. For some months now, Federal Funds Rate futures have been giving this scenario as highly likely. The number of Fed officials ready to raise rates next year has risen from six to nine (out of eighteen).
The Fed lowered its growth (GDP) estimates for this year to 5.9% from 7.0% in June and revised the unemployment rate upwards to 4.8% from 4.5% in June. The unemployment rate is then expected to fall by one point to 3.8% in 2022 but given the sudden changes in the Fed's forecasts every three months, even longer forecasts are of little value.
Inflation was also revised upwards to 4.2% from 3.4% in June. The fact that in 2022 it is forecast at 2.2% should make you realise that forecasts longer than three months are practically worthless with Powell & Co.
“We are seeing upward pressure on prices, particularly because supply bottlenecks in some sectors have limited how quickly production can respond in the near term,” Powell said, adding that “these bottleneck effects have been larger and longer-lasting than anticipated, leading to upward revisions to participants inflation projections for this year.” Powell projected that “while these supply effects are prominent for now, they will abate, and as they do inflation is expected to drop back toward our longer-run goal.”
So, for the time being, the Fed still anticipates being able to spur employment while keeping a lid on inflation, which it views as the result of "transitory" forces that will ebb on their own. Statements which, in all honesty, have left me very puzzled.
This is what emerged from the Fed meeting on 21-22 September. I am still on the subject of inflation because the information I have is a little different from the Economic Projections. First, here is the chart of the Consumer Price Index (which you can find on the U.S. Bureau of Labor Statistics website).
So, as the chart shows, inflation in August was above the Fed's forecast for this year, at 5.3%. But that's the least of it. A few weeks ago, I had a conversation with an ex official from the International Monetary Fund (IMF). He predicted a much worse scenario than the current one, with inflation in the United States set to exceed 10%.
If I thought the prediction was exaggerated then, I am not so surprised today, given Powell's thinking. What worries my interlocutor, however, is not inflation, there are other global aspects that may have important geopolitical repercussions. But here I must stop, I have been asked not to divulge what I have been told and I have promised to do so.
I conclude by saying, without breaking my promise, that in the future it will be another US macroeconomic data that will attract the attention of Powell and the economists, and that will be of great importance.
Federal Reserve gave several indications at yesterday’s meeting. For the time being, the monetary policy remains accommodative, keeping bond purchases at 120 billion a month, but tapering is just around
I am a macroeconomic and financial analyst with over 30 years’ experience, including two years as a fund manager. I specialise in currencies and commodities, and I am the author of several successful books on trading, macroeconomics, and financial markets.
