The Federal Reserve leaves markets hanging, as expected

The Federal Reserve has kept its monetary policy on hold once more. This was broadly as expected. No changes to the Fed Funds rate (at a range of 0% to 0.25%) and asset purchases of $120bn per month.

However, the one main change to the statement was that a “moderation in the pace of asset purchases may soon be warranted”. This is setting us up for the taper announcement in the November FOMC meeting (if all goes as expected). This is not dovish, but certainly not hawkish either.

FOMC tapering signs

The other key takeaways were:

Hawkishly laying out the path of rate hikes in the coming years. This comes via the Fed’s dot plots of interest rate projections:

  • 2022 – now suggests one +25bps increase (previously none projected for 2022)
  • 2023 – suggests three hikes (previously two)
  • 2024 – suggests three hikes (the first time 2024 has been included in the horizon)

There were also changes to the economic projections:

  • Growth – forecast moderated significantly for 2021 but increased for 2022/2023
  • Inflation – much higher at 3.7% this year, and falling a little less quickly (more sticky than previous).
  • Unemployment - marginally higher this year at 4.8% (from 4.5%) reflecting the impact of COVID and the delta variant is still having on the labor market.

What does this mean?

Overall, this is relatively hawkish. No taper as expected, but laying out the path to 2.50% as the long-term rate of Fed Funds including a 2022 hike, is marginally hawkish. However, given the market reaction, perhaps this has all been baked in already?


Initial Market Reaction

It is interesting to see that the US dollar has not strengthened on this. It has fallen, with reactions on forex pairs and commodities moving higher. Bond yields have been choppy but the US 10 year Treasury yield is marginally lower despite the increase in inflation projection. 

Markets do not know what to make of it into the press conference. It seems unlikely that these moves will hold and could be set for an ongoing choppy reaction.

  • US 10 year yield flat
  • EUR/USD +25 pips
  • Gold +$10
  • S&P 500 futures +10 ticks.