Fed to end QE and keep 'considerable time' guidance for low rates

The upcoming FOMC monetary policy meeting will most probably bring the end of the central bank's asset purchase program, despite recent comments from St. Louis Fed chief James Bullard that the move could be delayed. Apart from that, the wording of the accompanying statement will be scrutinized for changes, as this time there will be no press conference to provide further details on the Fed´s future actions.

The analysts polled for the forecast report all agree that the Fed will end it's QE3 program on Wednesday, tapering it by the remaining15 billion dollars. Yohay Elam sees it as very possible, pointing out that “the FOMC doves support the end of QE, all employment data (NFP, JOLTS, jobless claims) look great and inflation is OK.” In the opinion of Alberto Muñoz the move shouldn't have much of an impact on the US economy “as the Fed has committed to not selling the assets bought in the last years, even rolling over those assets which matures in the near term.”

Attention will therefore be rather focused on the statement released after the announcement of the interest rate decision. Market participants will specifically concentrate on whether the phrase “considerable time”, which refers to how much longer will rates stay at low levels, remains in the statement. The majority of the contributing analysts believe that there will be no change however as the Fed is still concerned about the global growth slowdown.

“Bets on a Fed rate hike in October 2015 currently stand at 49 percent, down from 85 percent at the end of September,” Ilian Yotov points out while Alistair Cotton speculates that “if the US economy continues its recovery further, interest rates could be raised by mid-2015 and conversely if the recovery faces further risks, then rate rises will be postponed and are likely to be more gradual.”

The FOMC will announce its monetary policy decision on October 29 at 18:00 GMT. Below you will find the full forecasts of the contributing economists.

Yohay Elam - Analyst at Forex Crunch:

"The Fed is expected to remove the doubts and end QE as planned. However, the "considerable time" guidance regarding low rates is expected to stay in the statement. Bullard surprised markets by suggesting that QE could continue. However, there are reasons to believe that QE will end: FOMC doves support the end of QE, all employment data (NFP, JOLTS, jobless claims) look great and inflation is OK. In addition, changing course on a stock market slide could erode the Fed's credibility. 

The genuine worries about global growth is likely to result in leaving the "considerable time" phrase. This is likely to change when the global outlook improves, and when the decision is accompanied by a press conference."

Alistair Cotton - Corporate Dealer at Currencies Direct:

"With the Federal Reserve’s QE stimulus programme at last drawing to a close, next week’s Fed policy meeting should be an important one to get directions on the way forward for monetary policy. It is likely that the it will continue to monitor the economy quite cautiously moving ahead.
 
The FOMC has an objective to manage a level of ‘maximum sustainable employment’ and with recent non-farm payroll numbers consistently outperforming expectations, wages will be continued to be closely eyed. With inflation having moved up above the targeted 2% level, it will not be too much of a concern for the Federal Reserve for now.
 
However, market expectations of an indicative timeline for an interest rate hike are likely to be subdued. Janet Yellen is likely to reinforce her stand that global economic risks are still looming and the Fed will keep a close watch with an accommodative policy, should market forces push Europe into a triple dip recession. As has been the stand for the last few months, if the US economy continues its recovery further, interest rates could be raised by mid-2015 and conversely if the recovery faces further risks, then rate rises will be postponed and are likely to be more gradual."

Ilian Yotov - FX Strategist and Founder at AllThingsForex:

"All you have to do is look at futures bets to gauge where the market feels the Fed is at this point. Bets on a Fed rate hike in October 2015 currently stand at 49 percent, down from 85 percent at the end of September. Although the Fed's outlook will be cautious, given the global economic slowdown, there is no reason for the U.S. central bank to stop tapering at this point. So, the Fed will most likely announce the end of QE altogether with a final $15 billion reduction in the monthly asset purchases, while at the same time stating its usual promise to keep rates near zero for a "considerable time". The odds of a dovish Fed are high, but the USD could still get a boost from the end of QE."

Nicky Ong - Co-Founder of Traders Corner:

"The FOMC is widely expected to conclude its asset purchase program after months of scaling back. U.S data has been generally supportive and points towards modest growth, although the downside risk to global growth and the risk of disinflation in the U.S mean the decision will not be clear cut.
 
The next big question is when the Fed will move towards normalising monetary policy after years of stimulus? The focus will be on the statement and whether the phrase - rates will remain low “for a considerable period”, remains in place.
 
Indicators suggest there is little chance of an interest rate hike before September 2015. This makes the wording of the statement even more important. I expect the Fed to end their controversial QE program, but leave the important wording of the statement unchanged."

Adam Narczewski - Financial Analyst at X-Trade Brokers, XTB:

"On the upcoming meeting, the Fed will cut the last 15 bln USD of QE and the market is 100% ready for it. The speculations are about when the first interest rate hike will happen. This is a very important discussion since depending on the timing of these hikes, bond yields and the USD will move. From the published chart (once every 3 months) we see that many FOMC members in September expected 3-4 interest rate hikes next year. Despite the fact the Eurozone economy is doing much worse and there is nervousness on the market, these predictions should not change as data from the US economy is pretty good: the labor market is getting stronger, industrial production is increasing and inflation is stable (just slightly below the Fed's target). On the other hand market rates have been declining as investors expect that the tightening of monetary policy will take longer than it was thought 2-3 months ago. Still, on the upcoming Fed meeting we will get the raw statement. Additional data and Yellen's press conference will take place in December."

Jameel Ahmad - Chief Market Analyst ForexTime (FXTM):

"Following an unexpected financial market sell-off under a fortnight ago, the US Federal Reserve finally announcing the conclusion of QE would provide a much needed boost in confidence that the global economy is in fact recovering.

The conclusion of QE would also be a vital indication that the Fed is stepping towards normalizing monetary policy, but that doesn’t mean they will be raising interest rates anytime soon. If Janet Yellen reminds us just how tentative the US economic recovery has been, and says that the labour market and other aspects of the economy continues to underperform then this should drive home the fact that the Federal Reserve will not be turning hawkish.

If the Fed really wants to devalue the USD, they could throw a curveball by suggesting a fourth round of QE remains an option. This would spell out to investors that the Fed are still not satisfied with the US economy and dismiss any remaining expectations for a rise in interest rates. Saying that, and although James Bullard caused a stir by suggesting QE should be continued if inflation targets become unattainable, last week’s better than expected CPI release seemed to dismiss fears the Fed would continue with QE.

Should the USD weaken in response to the Fed’s action, potential appreciation in Gold is likely. However, pairs such as the USDJPY, USDCAD and USDCHF look over extended right now and if there is USD weakness, opportunities for a pullback in these pairs are high. Although the USDJPY has already commenced the week by pulling back over 50 pips, the stochastic oscillator still appears heavily overbought and further downside moves will find support at 107.420, 106.870 and 106."

Alberto Muñoz, Ph.D. - Forex Analyst at FXstreet:

"Next FOMC meeting will be remembered as the meeting where QE ended, but I don't expect the Fed changing course this Wednesday. Probably what Yellen will do in the next months is to monitor inflation expectations trying to measure the impact of the final tapering. The end of QE shouldn't have any actual impact in the economy as the Fed has committed to not selling the assets bought in the last years, even rolling over those assets which matures in the near term. Therefore the only thing that the market will examine carefully is any change in the language of the statement. Any unexpected change in guidance language pointing out to a rates hike could spark a new rally in the greenback, otherwise there shouldn't be any significant move in the markets."

Valeria Bednarik - Chief Analyst with FXStreet:

"The main event of the week will be no doubts FED monthly economic policy meeting next Wednesday, when the US Central Bank is expected to trim the last $15B of its facilities programs. The market will be eager then to know what’s next, and when that will happen. I seriously doubt Mrs. Yellen will come with a certain date for the next logical step: a rate hike. The thing is that with inflation subdue, and the general slowdown among the major economies, it won’t be easy for the Central Bank to return to normal. Even more, some of FED members had been suggesting the FED may not tapper those last $15B next week: FED’s officers are concerned that if inflation weakens further, they might need even to revive QE; and while odds of such happening are limited and against their latest forecast, the scenario should not be disregarded. Highly unlikely, such action should trigger a run in US indexes, but a strong slide in greenback alongside. Taper with no clear date for a rate high will have a minimum impact in the forex board, while a certain date or a hawkish tone in the statement, also hardly possible, should boost the dollar and triggering selloffs among indexes."