Fed statement to be scrutinised for latest signals on taper timing

Federal Reserve updates

The Federal Reserve is expected to keep its main policy rate on hold at rock-bottom levels while beginning to sketch out in more detail its plans to begin scaling back its enormous asset purchase programme, as the US economic recovery advances.

The US central bank’s Federal Open Market Committee will release its latest statement on Wednesday at 2pm Eastern Time, followed by a press conference by chair Jay Powell.

Economists anticipate clear signals about the fate of the $120bn bond-buying programme, which the Fed pledged to keep in place until it sees “substantial further progress” on its goals of inflation that averages 2 per cent and maximum employment.

Fed officials, including Powell, have declared the inflation threshold met, given the surge in US consumer prices this year, but many acknowledge further ground still needs to be made up in the labour market recovery.

The statement is expected to be updated to indicate the economy is making strides towards the Fed’s dual goals, setting the stage for a reduction or “tapering” of its purchases of Treasuries and agency mortgage-backed securities as early as this year.

Some believe the announcement could come in November, especially if September’s jobs data is much stronger than August’s lacklustre report. Others say a December move is more likely.

The Fed will also publish on Wednesday an updated “dot plot’‘ of individual interest rate projections, which will show whether officials are adjusting their timeline for lift-off from current near-zero levels. The latest release in June indicated at least two interest rate increases in 2023, which was much faster than market participants expected and led to sharp gyrations in the US government bond market.

Minor adjustments could lead to major shifts in September’s dot plot, including an interest rate increase potentially pencilled in as early as 2022 or another added to 2023, to bring the total to three. It will also for the first time include a 2024 forecast.

New projections about growth, inflation and unemployment are also expected. In June, the median FOMC participant predicted gross domestic product growth of 7 per cent this year, with the unemployment rate steadying at 4.5 per cent.

Core inflation was expected to be 3 per cent this year and slip back to 2.1 per cent in 2022. Economists anticipate a sharp revision higher in the inflation forecast to incorporate the more significant jump seen over the summer.

The Fed meeting comes at a tenuous time for financial markets, which suffered the biggest sell-off in months this week amid worries about potential contagion from the liquidity crisis hamstringing China’s Evergrande, the world’s most indebted developer.

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