FOMC Preview: What to expect from the US Fed meeting
12:08, 15 December 2021
The Federal Open Market Committee (FOMC) meeting is the key market event of the day.
Investors will be paying particular attention to how much the US Federal Reserve will slow monthly asset purchases (tapering) from the current pace of $15bn (£11.3bn) monthly, as well as how the members' estimates for the interest rate-hike cycle (dot-chart) and economic projections in the coming years have evolved.
In September, the dot-chart revealed a median estimate of one rate hike in 2022, followed by three increases in 2023. In the economic projections, inflation forecasts were revised upward from June levels, with PCE inflation predicted to remain at 2.2% in 2022 and 2023 but gradually return to 2% in the long term.
Federal Reserve economic and monetary policy projections as of September 2021
Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assumptions of projected appropriate monetary policy, September 2021 – Credit: Federalreserve.govSince then, US labour market conditions have continued to improve and inflation has continued to climb. The unemployment rate in the United States decreased to 4.2% in November, considerably below market predictions of 4.5%, while inflation increased to 6.8% year-on-year, the highest level since June 1982.
Rising inflation and a tightening labour market indicate that the Fed could likely accelerate the speed of its monetary policy normalisation, even though the new Omicron variant of Covid-19 represents a downside risk to the economic outlook.
Investors should also keep an eye out for a possible shift in communication toward inflation, as Chair Jerome Powell has already declared the time has come to remove the phrase “transitory” from talk of rising prices.
The FOMC press release is set to be issued at 19:00 UTC today, with Chair Powell's press conference beginning at 19:30 UTC.
What analysts expect from the Fed today
The market predicts the Fed will accelerate the pace of tapering, with the process expected to be completed by spring 2022.
According to David Woo, founder and CEO of David Woo Unbound, the Fed will become increasingly more hawkish by tightening financial conditions faster, with the tapering process finishing as early as March 2022, due to a consistently high inflation.
Mark Cabana, Bank of America's Head of Rates Strategy, anticipates the Fed will double its pace and lower monthly Treasury and MBS purchases by $20bn and $10bn, respectively. The new dot plot is expected to show the dots are moving forward, with a median trajectory of two interest rate hikes in 2022, followed by three in 2023, and four in 2024.
Also, ING and Citi are in the camp of those expecting the Federal Reserve to double the rhythm of tapering to be on track to end purchases by March instead of May.
BBVA anticipated only a $5bn increase in the acceleration of the asset purchase reduction, but with a more aggressive dot-plot and an adjustment in the statement language.
DNB Capital Markets shifted its predictions for the end of the tapering to early in the spring, and now expects the median in the new dot chart will show three rate rises next year and another three or four hikes in 2023, as inflation remains stubbornly high.
Banca IMI forecasts two Fed funds rate rises in 2022, three in 2023, and a rate point of 1.75% to 2% in 2024, although the risks are strongly directed higher, with the possibility of seeing three hikes if inflation stays elevated.
Implications for the US dollar
Today’s Federal Reserve decision is critical to the US dollar’s fate. If the Fed announces a quicker pace of tapering and speaks more hawkishly about inflation, the USD will almost certainly consolidate or even extend current gains against its major peers.
Also, the projection of the median expectation for the path of rate hikes is crucial in understanding whether the Fed will keep up with market expectations.
US money markets are currently pricing in an implied 70 basis point cumulative rate hikes by the end of 2022, according to the latest CME's FedWatch Tool
Read more: Federal Reserve feeling pressure to tackle inflation
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