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The November FOMC meeting would see the Fed making a formal announcement on QE tapering. We expect the plan would begin immediately and is expected to end by mid-2022. The Fed funds rate will stay unchanged at 0-0.25%. The market has priced in over 60% of a rate hike in June 2022. This appears unlikely unless the QE program is scheduled to finish earlier. We look for the Fed’s forward guidance regarding this.
Economic Developments
Economic growth surprised to the downside. GDP expanded an annualised +2% q/q in 3Q21, compared with consensus of +2.6% and +6.7% in 2Q21. Supply chain disruption and the spread of delta variant were the key reasons for the disappointment. Consumer spending grew +1.6%, down sharply from +12% in 2Q21 but better than consensus of +0.9%. Leading indicators signaled that the momentum has picked up again in the fourth quarter. For instance, Conference Board’s consumer confidence index improved to 113.8 in October, beating consensus of 108 and September’s 109.3. University of Michigan sentiment climbed +0.3 point to 71.7 in October. The ISM activity indices due next week is closely watched.
Inflation continued to accelerate. Headline CPI rose to +5.4% y/y in September, from +5.3% in August. Core CPI steadied at +4%. Meanwhile, the Fed preferred inflation gauge, PCE deflator rose to +4.4% y/y in September, from +4.2% a month ago. Core PCE deflator steadied at +3.6% y/y in the month. Strong inflation pressure proves more persistent than previously anticipated. At a virtual conference hosted by the South African Reserve Bank, Fed Chair Jerome Powell warned of the risk of “longer and more persistent bottlenecks and thus to higher inflation”. He also pledged to “use our tools to guide inflation back to 2%”, although noting that hiking interest rates was “premature”.
Monetary Policy
At the minutes of the September meeting, the Fed noted that tapering of asset purchases “could commence with the monthly purchase calendars beginning in either mid-November or mid-December”. The Fed is widely anticipated to formally announce the tapering plan at the upcoming meeting and we expect the tapering to begin immediately. The September minutes also indicated that the pace would be “monthly reductions in the pace of asset purchases, by US$10B in the case of Treasury securities and US$5B in the case of agency mortgage-backed securities (MBS)”. The pace would lead to a completion of the entire asset purchases by mid -2022. A hawkish surprise – monthly reduction at a faster pace- cannot be ruled out given the inflationary pressure.
With tapering a done deal, the focus would be on the timing of the first rate hike. In September, the median dot plot revealed that half of the members had anticipated a rate hike in 2022. Meanwhile, the market has priced in futures have priced in over 60% of a rate hike by June 2022 (CME’s 30-day Fed funds). While the next median dot plot will not come until December, we are of interest to see if the Fed would comment on the market pricing.