FOMC monetary policy decision is the major focus today, as Fed should finally make a formal announcement on QE tapering. As the September minutes indicates, 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 would eventually lead to completion of entire asset purchases by mid -2022. But, a hawkish surprise – monthly reduction at a faster pace – cannot be ruled out given the inflationary pressure.

Also, September’s 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 next year. But Fed Chair Jerome Powell would likely reiterate that decision on interest rate is complete separated from that of asset purchases. There wouldn’t be any new hint on the timing of rate hike until December’s dot plot.

Suggested readings on Fed

• FOMC Preview – Tapering to Formally Begin
• FOMC Preview: It’s Time To Taper
• Fed Research Preview: Tapering, Yes, But How Fast?
• October Flashlight for the FOMC Blackout Period

Fed Chair Jerome Powell said at a conference today, “We’ve come a long way in policy tightening and the stance of policy is restrictive.”

Also, “We face uncertainty about the lagged effects of our tightening so far and about the extent of credit tightening from recent banking stresses.”

The Fed Chair suggested that the central bank now has room to scrutinize the economic data and evolving outlook more closely, and make measured assessments. “Having come this far, we can afford to look at the data and the evolving outlook to make careful assessments,” he added.

Interestingly, Powell emphasized the influence of the banking sector on the current financial landscape. He said, “While the financial stability tools helped to calm conditions in the banking sector, developments there on the other hand are contributing to tighter credit conditions and are likely to weigh on economic growth, hiring and inflation.”

“As a result, our policy rate may not need to rise as much as it would have otherwise to achieve our goals. Of course, the extent of that is highly uncertain,” Powell concluded.

Fed Chair Jerome Powell will testify to the Congress on coronavirus and CARES act today. In pre-released opening remarks, He reiterated that Fed is “committed to using our full range of tools to support the economy”. Fed’s actions are “only a part of a broader public-sector response”.

After lowering interest rate to near zero in March, the board expects to ” maintain interest rates at this level until we are confident that the economy has weathered recent events and is on track to achieve our maximum-employment and price-stability goals.”

Full remarks here.