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FOMC Meeting Preview: Taper So Close, Yet So Far Away

By Matthew WellerForexJul 27, 2021 12:17AM ET
www.investing.com/analysis/fomc-meeting-preview-taper-so-close-yet-so-far-away-200593777
FOMC Meeting Preview: Taper So Close, Yet So Far Away
By Matthew Weller   |  Jul 27, 2021 12:17AM ET
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When the Fed last met back in the halcyon days of mid-June, US COVID cases were averaging “just” about 12K per day, mask mandates were getting relaxed, and everyone was looking forward to a strong recovery through the summer.

What a difference six weeks can make!

Now, US COVID cases have nearly quadrupled to more than 50K per day, policymakers are considering expanding economic restrictions on health concerns, and some states are seeing their emergency rooms overrun with sick patients for (at least) the third time in the past 18 months.

Against this backdrop, the Federal Reserve is likely to strike a dovish tone, noting that it will continue to aggressively support the economy as needed until it reaches full employment or inflation sustainably exceeds the its 2% target.

Below, we highlight the two key areas of focus for this week's Fed meeting:

1. “Transitory” inflation

Since the last FOMC meeting, we’ve seen the US Consumer Price Index (CPI) measure of inflation spike to 5.4% y/y, well above the Fed’s target, though much of the increase was due to likely temporary factors like supply chain disruptions and travel/lodging costs. Even the Fed’s preferred inflation measure, Core Personal Consumption Expenditures (PCE), rose by 3.4% in May. While Fed Chairman Jerome Powell is likely to stick to the script that these price increases are “transitory,” these explanations may soon start to lose their efficacy if inflation remains elevated (or even accelerates from here).

At the last meeting, Powell noted that the US is:

“Experiencing a big uptick in inflation, bigger than many expected … and we’re trying to understand whether it’s something that will pass through fairly quickly or whether, in fact, we need to act.”

He went on to add that the economy is “not going to be going into a period of high inflation for a long period of time … we have tools to address that.” Expect Powell to face some tough questions about how the Fed would react if price pressures fail to recede as anticipated.

2. Taper timeline

For months, traders have been focused on the late August Jackson Hole summit of central bankers as a likely time for Chairman Jerome Powell to announce the Fed’s tapering plan, though with COVID resurging, August now looks like the absolute earliest potential time for a tapering announcement, with the Fed meetings in September or November now looking increasingly likely. Regardless, Fed officials have repeatedly noted that they plan on signaling that tapering is coming “well in advance,” a phrase that the central bank last used in 2017 ahead of its balance sheet runoff. That time, the phrasing meant two meetings before the event, suggesting that the central bank may hint at tapering in August or September ahead of a formal start closer to December.

Market to watch: EUR/USD

With the ECB seemingly at least a couple of months behind the Fed in terms of “normalizing” monetary policy, EUR/USD could see some interesting price action around this week’s FOMC meeting. The world’s most widely-traded currency pair has been grinding its way gradually lower over the last month, forming a well-defined bearish channel over that period.

That said, the pair has formed a triple bullish divergence with its 14-day RSI over that period, signaling that the selling pressure has been waning on each additional foray lower:

EUR/USD Daily Chart
EUR/USD Daily Chart

If Jerome Powell and company strike an even more dovish note than expected, EUR/USD could rally through its 21-day EMA back toward the 100-day EMA above 1.1900. Meanwhile, a more hawkish press conference and statement could keep the bearish trend intact for a potential test of the multi-month lows near 1.1700.

Original Post

FOMC Meeting Preview: Taper So Close, Yet So Far Away
 

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FOMC Meeting Preview: Taper So Close, Yet So Far Away

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Comments (3)
JAMES CUNHA
JAMES CUNHA Jul 27, 2021 7:31PM ET
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no one is talking about the Fed ceasing the purchase of bonds. Tapering means a gradual reduction the Fed spends to buy bonds each month. The Canadian Central Bank began tapering its asset purchases since April 2021.  The Canadian economy has not collapsed as a result of its Central Bank tapering asset purchases. When you create too much liquidity, you run the risk, as we are seeing here, of inflation surging upward.  I disagree with Fed Chair Powell, I don't believe the inflation we are seeing in the U.S. is transitory.  The slow down in sale of homes recently is a result of the home prices that have steadily climbed.  Many economists believe that we are seeing the housing market turn into an asset bubble.  The same is true with the equity markets.
JAMES CUNHA
JAMES CUNHA Jul 27, 2021 7:31PM ET
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If you notice, every other week the equity markets appear to be trading at all-time highs.   How can the Fed truly justify their prolonged loose monetary policy? Although Fed Chair Powell claims that the Fed's policies are to help with employment and bridge the income gap, I am seeing the complete opposite. Any improvement in employment is a result of businesses reopening.  Ultimately, the working class and small businesses are hit the hardest by inflation. It doesn't seem right that the Fed continues to ignore the issue by passing it off as "transitory" while CEOs of tech companies are paying themselves billions by cashing in their company shares while the markets are trading at all-time highs.
hans gaaikema
hans gaaikema Jul 27, 2021 1:42AM ET
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fed can not stop buying bonds. if they do, bond market collapses, after a bond markrt collapse, bonds gibe higher yield than stock, abd stocks collapse.
Dickson Mwanza
Dickson Mwanza Jul 27, 2021 1:15AM ET
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how to trade this??
John Smit
John Smit Jul 27, 2021 1:15AM ET
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don't try, not worth it. Wait till the dust settles. Good luck!
 
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