FED Preview: May Not Announce a Timetable

The Fed has the tough job of reassuring markets after the Evergand crisis and two weeks of mounting losses in stocks as the US economy struggles with declining jobs and the worst inflation in a decade.

The meeting is expected to address the taper timeline, however, investors eye the taper start date, in particular, so that they could make their investment-related decisions.

The importance of the statements by the U. S. Federal Reserve lies in the fact that any reduced central bank’s stimulus and interest rate hikes tend to lift bond yields and accordingly could raise the opportunity cost of holding non-interest-bearing gold.

American equities have been on a prolonged losing streak. The Dow is down 4.8% from its August 16 high of 35,631.19, including a 1.8%, 614 point plunge on Monday. The S&P 500 has dropped 4.2% from its September 2 top at 4,545.85, losing 1.7%, and 75 points on Monday.  

The Fed will issue its policy statement and this year’s third set of economic and interest rate forecasts at 2:00 p.m. ET on Wednesday. Federal Reserve Chair Jerome Powell will speak and answer questions for an hour, beginning 30 minutes later.

Powell is widely expected to clarify the Federal Reserve’s start of reducing asset purchases of $120 billion in trembling Treasuries and securities before the end of the year.

Three weeks ago, it was speculated that the FOMC would announce a cut schedule on Wednesday, but the economic picture has changed significantly since then.

US job creation fell by more than 800,000 from July to August, the headline inflation rate remained above 5%, and the Producer Price Index reached its highest level in more than ten years, ensuring higher prices in the long run.

The Fed has been preparing the markets for the end of the bond program since the FOMC meeting in April which was released in mid-May. The Fed knows that ultra-low interest rates are not for healthy economics. Under Janet Yellen, the Fed took a long ride to raise rates despite no signs of tightening – the Fed is in a similar position now.

As soon as the bank signals the start of a taper, credit markets will likely raise interest rates with the dollar following them.

Part of the market expectation indicates that the Federal Reserve Chairman will repeat what he did previously, indicating the start of reducing asset purchases before the end of this year. Still, this statement is not expected to include a clear timetable or a specific date for the start of these measures, although the Fed will have 3 Only meetings before the end of the year. The reason behind expecting the absence of any timetable is the recent and adverse effects on the outlook, most notably the job market and inflation.