U.S. Fed Meeting Outcome:

For a long time, markets have been looking forward to the FOMC meeting outcome and expecting some guidelines from the central bank on the quantum and timeline related to the tapering of the Quantitative Easing Program.

Consensus Expectations from the FOMC Meeting

• According to the consensus, markets were expecting the tapering to start either in November or December. Currently, the U.S. Fed is making a monthly purchase of $120B of treasury and mortgage-backed securities.

• However, markets expect the Fed to trim the monthly purchase pace by $10B in Treasury and $5B in mortgage-backed securities once the tapering starts.

• The other focus for the market was on the dot-plot, which charts the policymakers’ economic and rates projections for the coming years. Expectations are for the U.S. Fed to reveal the dot-plot for 2024 with no change in the interest rate cycle forecasts for 2022 and 2023.

Meeting’s Outcome:

U.S. Fed Holds Interest Rates Stable, Hints Tapering May Start Soon

The U.S. Fed keeps interest rates steady for now but indicated that rate hikes might happen sooner than expected. More members now see the first interest rate hike occurring in 2022 if progress continues as expected.

Throwing light on asset tapering, the committee sees the need to moderate the pace of asset purchases if the progress continues as expected.

U.S. Fed’s Updated Dot Plot:

The Fed’s dot plot signals the outlook of the interest rate path. Each dot represents the view of a Fed policymaker for the rate’s target range at the end of each year shown. Nine of the 18 members project rates to rise in 2022, higher than seven members in the June meeting. Members are forecasting interest rates to be hiked twice in 2023. The median dots showed 0.5 hikes in 2022, 3 more hikes in 2023, and 3 more hikes in 2024.

Fed Policymakers Turned Hawkish, Looking at the Increased Inflation Outlook:

The inflation outlook jumped 80bps to 4.2% for 2021. Thus, the policymaker turned hawkish, increasing benchmark interest rates from the current near-zero level to a median projection of 0.3% for the next year.

Fed is Proactively Evaluating the Pros of Central Bank Digital Currency:

The Fed Chairman said the U.S. isn’t behind in terms of digital currency innovation. The Fed is proactively working on evaluating whether to issue a central bank digital currency. It will soon publish a discussion paper to assess whether CBDC’s tangible assets outweigh the costs and risks involved.

Fed Believes the Evergrande Debt Situation is particular to China:

The chairman said the situation is very particular to China. For a growing economy, the debt levels are at severe levels. However, the situation doesn't pose a threat to Chinese or global economies.

Urged the Congress to Raise Debt Ceiling

The Fed urged the U.S. Congress to raise the debt ceiling so that the U.S. doesn’t fail on its debt obligations. There could be severe consequences if the U.S. defaults on its payments.

Powell on Taper

In the press conference, Fed Chair Jerome Powell said that FOMC participants favor concluding the taper around mid-2022, which likely implies a tapering pace of $15B per month.

Market’s Reaction

The Dow, S&P 500, and Nasdaq Composite rose roughly 1% each. The 10-year Treasury yield drifted lower after making some volatile moves during Powell’s press conference. It was trading near 1.3%. SGX Nifty, trading above 17,650, indicates a strong opening for the Indian market. Also, the U.S. futures are trading higher today.

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