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America’s central bank could wrap up its stimulus programme and raise interest rates earlier than expected, with inflation at a 30-year high and the jobs market improving.
The minutes of the Federal Reserve’s most recent meeting, released last night, show that some policymakers are moving towards ending its bond-buying scheme sooner than thought, given the US’s high inflation rate which hit 6.2% last month.
The Fed started tapering its $120bn/month asset purchase scheme at this month’s meeting, cutting it by $15bn per month — at which rate it would end by next June.
But the minutes drop a clear hint that tapering could be speeded up:
“Various participants noted that the (policy-setting) Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the Committee’s objectives.”
Some more dovish Fed members stressed they should take a “patient attitude” toward incoming data given supply chain problems and the pandemic.
Participants noted that the Committee would not hesitate to take appropriate actions to address inflation pressures that posed risks to its longer-run price stability and employment objectives.
The prospect of the Fed tightening policy faster than expected has weighed on the pound and the euro in recent weeks. Last night, sterling touched its lowest level of 2021, trading at just $1.3325 to the US dollar.
The euro is even weaker – at its lowest against the US dollar since July 2020, and near a 21-month low against the pound.
The FOMC Minutes suggested the doves on the committee are “in retreat”, says Jeffrey Halley, senior market analyst at OANDA:
The committee noted that inflationary expectations in the near term could exceed forecasts and that a faster tapering is not out of the question.
It is probably the last item that weighed on markets the most. Once again, currency markets were the pressure relief valve, with the US Dollar spiking once again, helped along by a soggy German IFO [business climate survey], fears of virus lockdowns and ECB officials pouring cold water on rate hikes.
The news yesterday that US jobless claims have plunged to the lowest level since 1969 could also encourage the Fed to tighten policy faster.
Deutsche Bank expect the Fed to press down on the taper accelerator in December, by doubling the cuts to its purchases of US government debt (Treasuries) and mortgage-backed securities.
That would wrap the scheme up three months sooner than planned, as DB strategist Jim Reid explains:
This would bring monthly reductions in Treasury purchases to $20bn [up from $10bn] and MBS purchases to $10bn [up from $5bn], which would bring the end of taper forward to March.
In line, they’re bringing their call for liftoff forward a month to June 2022.
Something for investors to ponder. Although…Wall Street is closed for Thanksgiving, while European stocks are expected to open higher despite concerns about the fourth wave of Covid-19.
- 8.30am GMT: Swedish central bank interest rate decision
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- 11am GMT: CBI distributive trades survey of UK retail sales in October
- 12.30pm GMT: European Central Bank publishes its Monetary Policy Meeting Accounts