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The US central bank could close its stimulus program and raise interest rates sooner than expected, with inflation at a 30-year high and an improving job market.
The minutes of the last Federal Reserve meeting, released last night, show that some Policymakers are set to end their bond buying program sooner, given the high inflation rate in the United States which reached 6.2% last month.
The Fed began cutting its asset purchase program by $ 120 billion per month this month, slashing it by $ 15 billion per month, the rate at which it would end next June.
But the minutes clearly suggest that the reduction could be accelerated:
Various participants noted that the (policy-making) committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants are currently anticipating if the Inflation continued to exceed levels consistent with the committee’s objectives. . “
Some more accommodating members of the Fed have stressed that they should take a “patient attitude” to incoming data given supply chain issues and the pandemic.
Participants noted that the Committee would not hesitate to take appropriate measures to deal with inflationary pressures which posed risks to its long-term price stability and employment objectives.
The prospect of a faster than expected Fed policy tightening has weighed on the pound and euro in recent weeks. Last night, the British pound hit its 2021 low, trading at just $ 1.3325 to the US dollar.
The euro is even weaker – at its lowest against the US dollar since July 2020, and near its 21-month low against the pound.
FOMC minutes suggest committee doves are “in retreat,” says Jeffrey Halley, senior market analyst at OANDA:
The committee noted that short-term inflation expectations could exceed expectations and that a more rapid reduction is not excluded.
This is probably the last element that weighed the most on the markets. Once again, currency markets were the pressure relief valve as the US dollar rose again, helped by a soggy German IFO [business climate survey], fears of virus locks and ECB officials pouring cold water on rate hikes.
Yesterday’s news that jobless claims in the United States fell to their lowest level since 1969 could also prompt the Fed to tighten policy faster.
Deutsche Bank Expect the Fed to step on the gradual accelerator in December, doubling down on its purchases of U.S. government debt (Treasury) and mortgage-backed securities.
That would end the program three months earlier than expected, as DB strategist Jim Reid explains:
This would bring monthly cuts in treasury purchases to $ 20 billion [up from $10bn] and purchases of MBS at 10 billion dollars [up from $5bn], which would bring the end of tapering to March.
Online, they are advancing their take-off call by one month until June 2022.
Something for investors to ponder. Although … Wall Street is closed for Thanksgiving, while European stocks are expected to open higher despite concerns about the fourth wave of Covid-19.
- 08:30 GMT: Swedish central bank decision on interest rates
- 9:30 a.m. GMT: Weekly real-time indicators of economic activity and social change in the UK
- 11am: CBI retail survey on UK retail sales in October