US Dollar Strengthens as Fed Signals Tapering as Early as November

Sculpting up turbulent trade on Wednesday, the world stock indexes reduced their gains in late-day trading and the dollar gained as the Federal Reserve said that it is on track to end its monthly bond purchases later this year. Following the Federal Reserve’s recent policy announcement, stock prices moved rapidly.

As soon as November the Federal Reserve will start to scale down its asset purchases, and will have completed the process by the middle of 2022, according to Federal Reserve Chair Jerome Powell. In announcing the first steps toward ending the U.S. central bank’s use of extraordinary measures to assist the economy during pandemic, Powell told reporters Wednesday that tapering may begin soon.

He used the Nov. 2-3 period as the deadline for framing new policies, but acknowledged that if more time was required, the tapering process will be postponed. Furthermore, he stated that tapering was not intended to serve as a clear indication of when the rates would be raised. Following the conclusion of the two-day meeting of the Federal Open Market Committee, he stated, “The timing and pace of the impending decrease in asset purchases will not be done with the intent of delivering a signal about the timetable of interest rate liftoff.”

Investors analyzed his statement, and the White House parsed his performance. The head of the country’s central bank’s tenure ends in February and Vice President Joe Biden is anticipated to make a decision on whether or not to reappoint him to another four years in the position before the end of the year. Officials also announced revised forecasts that indicate members on the FOMC are now equally divided over whether the funds rate should be lifted next year, according to the median estimate.

The median forecast predicted no more rises in interest rates until 2023. According to Diane Swonk, Grant Thornton’s senior economist, “we’re witnessing a more hawkish Fed.” US equities declined, while long-term Treasury rates increased.

The Federal Open Market Committee (FOMC) agreed to keep the target range for its benchmark interest rate at zero to 0.25 percent, and continue with a $120 billion a month purchase of U.S. Treasury securities and mortgage-backed securities. The voting was unanimous in favor of the decision.

The median estimate predicted a fed funds rate of 1.8% by the end of 2024. The median price estimate for 2023 increased to 1%, from 0.6% as predicted in June.

“In terms of expectations, participants typically assume modest increases in monetary policy that, with the fed funds rate at a level below the long-run level through 2024, would lead to the target rate falling to below that level over time,” Powell said. In addition, the Fed announced it would increase the counterparty limit on its overnight reverse-repo program to $160 billion daily.

Unemployment dropped to 5.2 percent in August, far lower than the 14.8 percent high in April 2020. Though it is far above the 3.5% rate that existed in February 2020 before the pandemic hit, it is still below the 4.5% rate that prevailed in February 2021.

“Until labor-market conditions have returned to a level that the committee judges compatible with maximum employment,” is what Fed policymakers plan to do. While the Federal Reserve’s favored gauge of inflation registered 4.2% in the 12 months up to July, the central bank’s goal rate was 2%.

Many Fed officials believe that after supply chain disruptions stemming from the pandemic have been resolved, interest rates will return to around 2% over the next year. However, a number of officials have pointed to rapidly rising prices as another reason to begin raising rates earlier rather than later.

The dollar index gained 0.132%, while the euro fell 0.13% to $1.1708. The U.S. ten-year note yield slipped one-twelfth of a percentage point to 1.3277% after markets closed on Tuesday. Crude oil prices rose as US crude stockpiles dropped to their lowest levels in three years due to recent storm damage at refineries, resulting in an increase in processing activities.

Following two straight days of gains, US crude gained 2.26% to $72.08 per barrel and Brent rose 2.27% to $76.05 on the day. Spot gold fell to $1,770.30 an ounce, losing 0.2 percent of its value.