With its back up against a wall, the US Federal Reserve has pledged to begin tapering its asset purchase program. Beginning later this month, the Federal Reserve will taper the number of US Treasury Securities it purchases each month by US $10 billion and the number of Mortgage-Backed Securities by US $5 billion.
By all accounts, a dreaded ‘taper tantrum’ has been avoided in the wake of the announcement. At least in relation to the forex market. Federal Reserve chairman Jerome Powell has been extremely careful to prime investors for this moment. For one, all hawkish commentary from the chairman has been mediated with dovish caveats. Admittedly, less senior Federal Reserve officials have done much of the leg work in hinting and out-right suggesting the need for a reduction in its purchases. Either way, the conversation surrounding tapering has been sustained for months, giving investors time to mull over the implications.
As of writing, the USD index, the DXY has crossed back over the 94.00 mark and comfortable sits 94.33, up 0.53% since the Federal Reserve’s tapering announcement.
The Federal Reserve will still be purchasing $105 billion worth of securities, with further reductions dependent on continuing favourable economic outlook. The Federal Reserve has indicated it is considering reducing spending, month over month, moving forward. However, if economic conditions deteriorate, the spending reductions could be nullified or reversed. The Federal Reserve will be keeping an eye on inflation and the number of jobs added to the economy each month.
A significant consideration of the Federal Reserve when determining its reduction in spending is the US inflation rate. While it is at a 13-year high, the Federal Reserve maintains that most of the inflation experienced heretofore is temporary.
Octobers inflation number is released next Wednesday. Trading Economics is forecasting a 0.1% increase in US inflation.
Another significant consideration of the Federal Reserve when determining its tapering is the Non-Farm Payroll (NFP). The NFP indicates how many non-farm jobs were added to the economy in a given month. The data for the October non-farm payroll will be released tonight to great anticipation. Trading Economics is forecasting 400K jobs, while the market consensus is a little more optimistic and is forecasting 450K jobs.
The NFP has disappointed for the past two months, with actual job figures falling far short of the numbers predicted. Even so, the Federal Reserve has seen fit to begin tapering as job growth seemingly slows. Treasury Security Janet Yellen noted the US economy is still short 5 million jobs compared to pre-pandemic times, which will take the US years to recover at the current rate of job growth.