- The Federal Reserve's signaled a greater appetite to raise interest rates.
- Fed Chair Powell is a dove, and could signal slower tightening.
- Dollar volatility is set to remain elevated for longer.
Tapering is coming – it "may soon be warranted," according to the statement that has just been released by the Federal Reserve. Moreover, nine members now see interest rates rising in 2022 – up from seven last time. The dollar's initial rise has been reversed as nine out of 18 does not consist of a majority. It is even odds for raising borrowing costs next year – less than bulls would have wanted.
It is also essential to note that several hawks will become voting members in 2022, raising the chances of a rate hike coming next year. However, Federal Reserve Jerome Powell is not one of them.
How close is the Fed to raising interest rates? Probably further away than the dot-plot suggests. The last word begins to the Chair, and he is a known dove – hitting the pedal on the metal when the pandemic appeared and then pushing a policy change in which the bank prioritizes employment at the expense of higher inflation.
Moreover, Powell has ammunition to play down inflation – Core CPI fell to 4% YoY in August, partially due to the fall in prices of used cars. The Fed Chair's stance that inflation is transitory seems to have been vindicated.
On employment, there is still "ways to go" – only 235,000 jobs were created last month, far below expectations. Powell could easily emphasize the fact that millions of Americans employed before the pandemic are still out of work.
What could Powell say? He could hint that tapering will have to wait until December instead of November, the first pushback to the timeline of rate hikes. Secondly, he may signal that reducing the bond-buying scheme could be a slow process.
Last but not least, the Fed Chair could repeat what his colleagues said – that ending the tapering does not imply an imminent rate hike. His colleagues already tried to decouple the two phases of tightening.
In the case of a cautious stance Powell, the market mood would improve and the dollar would drop, amid prospects of more greenback printing and a later date for raising borrowing costs.
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