What we are expecting from the FOMC meeting
While investors are pricing in a quicker end for the FED asset purchasing plan with increasing the level of tapering, we can see free fall in the stock markets with increasing VIX and DXY! Faster tapering can increase the chance of multiple rate hikes in 2022, even if Mr. Powell repeatedly said that tapering the asset purchases is a separate scenario with a rate hike!
According to a Bloomberg report, "JP Morgan, Morgan Stanley, Citi, and NatWest Markets are all anticipating the Fed's bond purchases to wrap up in March instead of June." Expectations are increasing, especially with CPI at 6.8% and PPI at 9.6% in November.
"Futures on the federal funds rate, which track short-term rate expectations, on Monday priced in a more than 90% chance of a quarter-point tightening by the Fed by May next year. Investors are pricing in between two to three rate hikes for 2022."
Different scenarios and Market reactions:
The rate hike chance in this meeting is zero. Therefore we have to follow and see will they increase the tapering size or not and check out the dot plot to find out the projections for the federal funds rate. Each dot represents the view of a Fed policymaker for the rate's target range at the end of each year.
The latest estimates and consensus expectations are for increasing the volume of asset purchases tapering up to $30B per month with at least two 25-bp rate hikes in 2022, followed by an additional three hikes in both 2023 and 2024. So now, aware of expectations, we can judge the announcement tone that of it is Hawkish or Dovish based on market understanding and expectations.
Based on expectations, even if we see the increase in the tapering scale, but less than $25B with one interest rate expectation in 2020, it means that FED is less Hawkish than expectations, therefore it will be interpreted as Dovish policy. More than $25B tapering scales in the asset purchases amount with at least two rate hikes, will be good enough to accept it as a tightening policy.
Since the September meeting, when the first whispers about tapering started, the US dollar increased more than 3.3%, and now with any Hawkish policy, it can increase even more. On the other hand, with such high expectations, less than expected Hawkish policy, which will translate as a Dovish policy by the market participants, will stop the DXY bulls and Stocks bears.
Today so far we have a 1.1% fall in SP500 price, while Dow Jones and NASDAQ also, losing 0.4% and 1.8% respectively. Unlike the US dollar, the Hawkish tone of announcement and decisions will push the bearish to go forward, while any Dovish understanding of the statement will stop the bears and even can send the Wall Street leading indices to the new all-time highs.
