OPINION
Market Rating Before FOMC MeetingJan 31
Is it time to Taper for the Federal Reserve?
The two-day meeting of the Federal Open Market Committee (FOMC) will end today at 20:00 (GMT+2). In the USA, which is the largest economy in the world, the Committee is expected to announce that they will start reducing (tapering) the asset purchase program as of today.
In the United States, consumer inflation reached the peak of 13 years ans started to form market forecasts for exiting the expansion policies that were originally implemented in the pandemic period.
According to the US Department of Labor, consumer price index (CPI) increased by 0.4 percent in September compared to the previous month and it was registered as 5.4 percent year-over-year. On an annual basis, producer price index (PPI) reached 8.6 percent in this period. Also, core personal consumption expenditures index (PCE) rose to 3.6 percent. In September, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment.
In addition, the Committee had indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. According to the U.S. Bureau of Labor Statistics, unemployment rate in the United States was 4.8 percent in September.
At this point, the size of the Fed's balance sheet exceeded 8.5 trillion USD. Due to the demand created by the low-cost abundant liquidity, commodity prices, especially the energy group, reached high levels in international markets. And recent supply bottlenecks resulted from pandemic overcame expectations that inflationary pressures are temporary. In particular, escalation in producer inflation indicates that the transition to the general level of prices will take more time than expected. And the path of Core PCE, known as the Fed's inflation, signals the rigidity in prices.
To sum up, the policies implemented specifically within the pandemic period led the employment to reach desired levels and the inflation outlook moved away from the average 2 percent target. So, we believe that the decision of the Federal Open Market Committee will officially declare the beginning of tapering at 20:00 (GMT+2). Markets expect the Fed to reduce asset purchases at the end of November or at the beginning of December and put an end to it in June 2022. We will also follow Chair Powell's comments in the press conference following the decision and we expect the Chair to be cautious while explaining the details about tapering.
In the United States, consumer inflation reached the peak of 13 years ans started to form market forecasts for exiting the expansion policies that were originally implemented in the pandemic period.
According to the US Department of Labor, consumer price index (CPI) increased by 0.4 percent in September compared to the previous month and it was registered as 5.4 percent year-over-year. On an annual basis, producer price index (PPI) reached 8.6 percent in this period. Also, core personal consumption expenditures index (PCE) rose to 3.6 percent. In September, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment.
In addition, the Committee had indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. According to the U.S. Bureau of Labor Statistics, unemployment rate in the United States was 4.8 percent in September.
At this point, the size of the Fed's balance sheet exceeded 8.5 trillion USD. Due to the demand created by the low-cost abundant liquidity, commodity prices, especially the energy group, reached high levels in international markets. And recent supply bottlenecks resulted from pandemic overcame expectations that inflationary pressures are temporary. In particular, escalation in producer inflation indicates that the transition to the general level of prices will take more time than expected. And the path of Core PCE, known as the Fed's inflation, signals the rigidity in prices.
To sum up, the policies implemented specifically within the pandemic period led the employment to reach desired levels and the inflation outlook moved away from the average 2 percent target. So, we believe that the decision of the Federal Open Market Committee will officially declare the beginning of tapering at 20:00 (GMT+2). Markets expect the Fed to reduce asset purchases at the end of November or at the beginning of December and put an end to it in June 2022. We will also follow Chair Powell's comments in the press conference following the decision and we expect the Chair to be cautious while explaining the details about tapering.
