Traders and Investors Are Focusing on Tomorrow’s FOMC Statement

The statement will contain information about when the Federal Reserve will begin tapering their $120 billion monthly asset purchases. The press conference will clarify any ambiguities found within the statement itself.

It is highly believed that the Fed will announce the onset of tapering tomorrow. They have already defined that tapering will reduce asset purchases by $15 billion each month. The reduction will be composed of $10 billion of U.S. bonds and $5 billion of MBS. Since the Federal Reserve has been buying $80 billion each month of U.S. debt instruments, it will take a total of eight months to complete the tapering process.

That means that if they begin tapering in November, they will not complete the tapering process until June 2022. It is also important to note that they will not begin lift-off until they have completed tapering.

But the real question becomes, is the current rise in inflation transitory? The rise in inflation has reached the highest level since 2008, with the CPI-U (Consumer Price Index -urban) currently fixed at 5.3% as of September 30, 2021. While the current inflationary rate is lower than the 6.5% reported on June 30, 2021, it is still extremely high. The Personal Consumption Expenditures Price Index (PCE) is currently fixed at 4.4% as of September 2021. This is the preferred index that the Federal Reserve uses; it strips out both energy and food costs. Regardless of which inflationary index you look at, we are at levels not seen in the last decade.

Concurrently the GDP for the third quarter of 2021 came in at 2%. Compared to the second quarter of 2021 of 6.7%, there is no doubt that we have seen a tremendous contraction of the economy in the United States. The Federal Reserve has been maintaining the idea that the rise in inflation is transitory based upon supply-chain bottlenecks and labor shortages. However, many analysts believe that interest rate hikes will not solve the problem of supply chain shortages. If the supply chain shortage is persistent, so will the rise in inflation.

It is that fact that has put the Federal Reserve in an extremely difficult position. While we expect the Federal Reserve to announce the onset of tapering, it will be when they begin to normalize interest rates that will be of most interest to the investment community. If Powell’s press conference skirts around the timeline for lift-off, it could disappoint many market participants and move gold higher.

Reuters reported that Carsten Fritsch, a commodities analyst at Commerzbank, said, “I expect the Fed will announce the start of tapering but I do not see them giving a specific timing around a rate hike. That may lead to some disappointment because market participants are expecting something more specific that could push gold towards $1,800 per ounce or even beyond that.”

The only certainty about tomorrow’s FOMC conclusion is that we will see increased volatility as market participants attempt to read between the lines of the Federal Reserve statement and chairman Powell’s press conference.

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Wishing you, as always, good trading and good health,

Gary Wagner