Federal Reserve Chair Jerome Powell
(Federal Reserve Chair Jerome Powell)

It’s U.S. Federal Reserve decision day

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After ending Tuesday’s (Sept. 21) session narrowly mixed, shares on the major equity market indices in the United States traded higher at open on Wednesday (Sept. 22), as the investors awaited the US Federal Reserve’s monetary policy ruling later this afternoon.

The US central bank will conclude its highly anticipated September meeting today and release a policy statement with economic and interest rate forecasts at 2 pm EDT (1800 GMT)

The Fed is widely expected to leave monetary policy unchanged but could provide guidance for its plans to begin scaling back its asset purchases. The central bank previously signaled a tapering of its emergency $120 billion in monthly bond buying could begin as soon as this year, although some disappointing economic data could lead the Fed to push back its plans. This year’s inflation expectations are set to be revised higher as supply chain disruptions prove longer-lasting than expected.

The policy statement will be followed by a press conference with Fed Chairman Jerome Powell 30 minutes later. Powell’s task of convincing investors that the time might be coming to start the removal of some monetary stimulus is made more difficult by the myriad risks facing the global economy.

Last month only 235,000 jobs were created in the world’s largest economy while inflation is HOT.

The core personal consumption expenditures price index- Fed’s preferred measure of inflation- as of July was about 4.2% on an annualized basis, its highest level since 1991. That is double the central bank’s 2% target .Stripping out food and energy items, the prices of which tend to be more volatile, the inflation index stood at 3.6%

The inflation report coincided with the Jackson Hole Symposium, where Powell carefully hinted at reductions to the Fed’s monthly asset purchases later this year.

Deutsche Bank Research wrote in a note on Sept. 17 that Powell will face a “disentanglement dilemma” when the policy-setting Federal Open Market Committee (FOMC) releases its updated set of “dot plot” projections, which will map possible paths for interest rates through 2024.

Meanwhile, world markets have been roiled by concerns about spillover effects from the potential collapse of embattled Chinese property developer Evergrande. The firm is facing a possible default if it can’t make millions of dollars in debt payments on U.S. dollar-denominated bonds later this week, raising the specter of a possibly systemic collapse inside the world’s number two economy.

The S&P 500 index kicked off the week with its largest daily loss in four months. Major averages have registered big losses for September, a tumultuous month for stocks. The S&P 500 is down 3.2% so far while the Dow is down 3.3% in September.

US Fed Funds Rate
(Source: US Federal Reserve)

UPDATE 22/09/2021 22:19

Tapering Asset Purchases May Be Warranted ‘Soon’

The Federal Reserve announced on Wednesday it will leave the interest rate unchanged at 0.00-0.25% as expected. As the economy has made progress toward employment and inflation goals and if progress continues broadly as expected, a moderation in the pace of asset purchases may soon be warranted, officials said.

Powell stated he would begin removing the training wheels from the U.S. economy as soon as November, although he left the door open to waiting longer if needed. Simply put: The Fed will keep buying $120B a month in assets in September, October and likely November as well.

“While no decisions were made, participants generally viewed that so long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate,” Powell added.

He does not expect the central bank to raise the interest rate before it ends the taper process.

The expectations for the gross domestic product growth in 2021 were revised down by 1.1 percentage points and now stand at 5.9%, less than 7% in the June projection. The Fed sees the economy expanding faster in both 2022 (3.8% vs 3.3% in the June projection) and 2023 (2.5% vs 2.4%).

In the statement, the Fed described inflation as “elevated” but continued to attribute the price growth to “transitory factors.”

PCE inflation is seen higher in 2021 (4.2% vs 3.4%) and 2022 (2.2% vs 2.1%)  while the Core PCE is predicted to end the year at 3.7%, 0.7 pps more than the month before. The unemployment rate is also expected higher this year (4.8% vs 4.5%).

Commenting on Evergrande’s ‘s imminent collapse, Powell said he doesn’t expect it would negatively affect the United States market.

U.S. stocks finished higher across the board during regular trading following the central bank’s commentary. The S&P 500 rose for the first time in five sessions advancing 0.95% and the Nasdaq 100 gained 1.02%. The Dow Jones closed up 1%, also snapping a four-day losing streak.

Meanwhile, traders took to Twitter: