When to start Rate hikes?
Wednesday, November 3 the FOMC will conclude its two days interest rate decision and monetary policy meeting. Investors expect the central bank to finally announce the timetable of the tapering of its asset purchases. Specifically, we are expecting that Fed to start reducing its Treasury security and mortgage-backed security (MBS) purchases by $10B and $5B per month, in December, respectively. For tapering, we have three possible scenarios.
Before going to see the different scenarios, let's first review the current situations. What we already know is that FED is currently buying $80 billion in Treasuries per month and $40 billion in MBS per month. After the last meeting in September, and in the press conference, FED chair, Mr. Powell indicated that the tapering of asset purchases should be ended by mid-2022. At the same press conference, Powell said that it is still early to talk about rate hikes.
The first scenario is that FED to announce as we expect the $15B decrease in the level of its monthly asset purchases. This is what the market is already priced in and will not affect the market that much, just as starting Hawkish policies, will put the stock market a bit under pressure and lift the US, but not far than these levels.
The second scenario is to increase the amount of reducing to any number more than $15B. It will affect more in the markets by sending the stocks a bit to the lower levels with DXY above 95 Mark, as it can be seen as a strict policy.
And finally, either the amount will be less or they say that in next meeting we will decide about the time and amount. The third scenario can lift Wall Street to the new levels, with a sharp fall of DXY under 91 levels.
Even if already we heard several times from FED that purchases would continue until "substantial further progress has been made toward the Committee's maximum employment and price stability goals.", however now increasing energy price, Row Material shortage, and Labor Market issues, that all lifting the inflation to the new levels, putting more pressure on FOMC members to be a bit more cautious about their decision. While the labor market has recovered nearly 80% of the jobs lost early in the pandemic, we can see enough progress that can convince the FED to start slowing their purchases.
And finally, we will have the FED outlook as well which is very important. We need to know that from the FED perspective, what inflation will look like. How long it will stay higher than the target? When can start decreasing and so on? Besides them, the FED outlook for the Employment market and GDP outlook. And after all, watch the statement and press conference 30-min after the statement publishing.
