FX Spotlight 4 Nov 2021 | USD: The Fed’s taper to start in mid-November | Article – HSBC VisionGo
- The Fed confirms tapering will start in mid-November, putting asset purchases on a path to conclude in mid-June 2022
- The USD softened modestly amid the largely anticipated FOMC outcome
- We believe the USD will have room to strengthen, due to the Fed’s path towards normalisation and slowing global growth
At the November meeting, the FOMC announced a USD15bn taper starting later this month, in line with consensus
At the 2-3 November meeting, the Federal Open Market Committee (FOMC) delivered on consensus expectations as far as tapering is concerned, while holding the federal funds target range steady at 0-0.25%. Beginning in mid-November, purchases of US Treasuries will be reduced by USD10bn each month and purchases of mortgage-backed securities (MBS) reduced by USD5bn. Another reduction in purchases will occur in mid-December. If tapering stays on this timeline, net asset purchases would reach zero in the middle of June 2022.
Changes to the statement included the observation of "sizeable price increases in some sectors", but high inflation is still viewed as "transitory"
The accompanying statement saw a number of changes from September’s but mostly to incorporate the shift from guidance on a future taper to the reality of taper delivery. The alterations to the description of economic developments were not provocative for the USD. There was a new acknowledgement within the statement, though one merely repeating observations in recent Fed rhetoric, that supply and demand imbalances have kept price levels elevated. The statement retained its observation that such inflationary pressures are due to transitory factors, and added that an “easing of supply constraints” should support “continued gains in economic activity” and “a reduction in inflation”.
Fed Chair Powell was clear that the Fed believes it is too early to begin the debate about the timing of rate hikes
The first question posed to Chair Powell in his press conference was whether financial markets were “wrong” to anticipate that the Fed will raise policy rates once or twice in 2022. He replied that the FOMC could be “patient” on rate hikes but that it would “not hesitate” if a policy response is called for. Powell’s baseline view is that as the pandemic subsides, supply bottlenecks will abate, jobs growth will pick up, and inflation will decline from current levels. Our economists think Powell’s comments show that the FOMC is prepared to take a wait-and-see approach with respect to using rate hikes to address inflation risks. Our economists’ baseline inflation projections suggest that rate hikes will commence only in 2023.
With no surprises in terms of policy action or the accompanying statement, there was little to immediately excite the currency market. Chair Powell’s press conference was similarly uneventful, but that lack of hawkish provocation was enough to see the USD weaken a little.
We believe the Fed’s path towards policy normalisation will continue to support a gradual strengthening of the USD in the months and quarters ahead
Looking beyond the largely consensus outcome from the November FOMC meeting, we believe the USD has room to strengthen. The FOMC may not be moving any more swiftly than expected to the exit from emergency levels of policy accommodation, but it is still exiting. This should be enough to support the USD against a number of currencies where central bank guidance is more overtly dovish, or where yields are lower than those in the US. The continued moderation in global activity is also likely to support the USD given its counter-cyclical personality. The November FOMC meeting was not a game changer, but it also should allow the USD to continue accumulating wins in the year ahead.