In its latest statement and press conference, the Federal Reserve said that it will likely begin reducing its monthly bond purchases as soon as November while implying that rates will begin to go higher sooner than originally anticipated.
The move came in response to overall improving conditions including stronger employment data and a very high expected inflation rate of 4.2%, more than double the original 2% target rate. Furthermore, 9 of the 18 members expressed readiness to increase rates next year to keep inflation in check.
Fed Chair Powell also mentioned that tapering will depend on a “reasonably strong” jobs report. In other words, the hawkish mood of the Fed created more flexibility for September’s employment data which is set for release in the first week of October.
Future inflation is expected to overshoot slightly according to the Fed with figures of 2.2% for 2022 and 2023 and 2.1% for 2024. The Fed has to balance between risks from the pandemic which remains moderate, possibly leading to shaky economic conditions which could affect employment, and sudden bursts of higher inflation.
The reaction was relatively mild, seeing the Dollar gaining against other major currencies before starting to reverse earlier today. The Euro traded in the mid-1.1700s against the Dollar before dipping towards 1.1690. The British Pound moved close to 1.3600 against the Dollar but looks stronger again this morning. Gold briefly approached 1790 before reversing lower and now trades around 1760s.
US equities turned volatile but remain on course to recover higher nearly 3 weeks of weak downside action. Dow Jones trades near 34400s, off from recent lows of 33600s.
According to analysts, future data that comes out better than expected for the Dollar could see a rush towards the currency as people begin anticipating long-term rates to go higher and the return of the carry trade.
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