The Road To Normalcy Begins (06 November 2021)

TVC:DXY   U.S. Dollar Currency Index
Fed starts tapering!
The long-awaited taper meeting has finally arrived! The Federal Reserve announced during their monetary policy meeting on Thursday that it will begin slowing down its net asset purchases by $15 billion per month which comprises of $10 billion Treasury bonds and $5 billion agency mortgage-backed securities. The first round of tapering will begin later this month and the second round will take place at the beginning of December.

Moving forward, the monthly pace of quantitative easing ( QE ) tapering will be similar to these two months and may be adjusted depending on the economic outlook. Regardless of the pace, the Fed is expecting QE to end by mid-2022.
The following illustration shows that under the same tapering pace, QE will end in June 2022.

Nov 2021: $70b Treasury Bonds + $35b Agency MBS
Dec 2021: $60b Treasury Bonds + $30b Agency MBS
Jan 2022: $50b Treasury Bonds + $25b Agency MBS
Feb 2022: $40b Treasury Bonds + $20b Agency MBS
Mar 2022: $30b Treasury Bonds + $15b Agency MBS
Apr 2022: $20b Treasury Bonds + $10b Agency MBS
May 2022: $10b Treasury Bonds + $5b Agency MBS
Jun 2022: End of QE

A small step back on “transitory”
With the recent comment made by Fed Chairman Powell that supply bottlenecks will take longer to ease, thus expecting prices to remain high for a longer period of time, the Fed has taken a small step back from its view on inflation being transitory. The previous confidence that the elevated inflation “largely reflecting transitory factors” has now been revised to “largely reflecting factors that are expected to be transitory”.

During the press conference, Powell also clarified the definition of “transitory” that the central bank adopts after highlighting that the word has different understanding to different people. For the Fed, “if something is transitory it will not leave behind permanently – or very persistently higher – inflation”.

With the ongoing supply chain disruptions, the central bank Chief is expecting inflation to continue its rise into 2022 before easing back down during mid-2022.

Maximum employment still quite a distance away
Although tapering of the massive $120 billion per month QE programme has begun, Powell warned that the Fed’s decision to do so does not imply a rate hike is underway. The central bank held its interest rate unchanged at the targeted range of 0-0.25% and would like to see the labour market achieve maximum employment before considering a hike. As of the October’s jobs report, the U.S. job market is still some 5 million jobs away from the pre-pandemic level. The Fed is likely going to consider a rate hike only when the jobs lost during the pandemic have been fully recovered . Even so, the central bank may wait a little longer to be certain that jobs growth is indeed consistent before committing.