Federal Reserve accelerates QE program cuts and forecasts 6 interest rate hikes in next two years

According to the results of the FOMC meeting, the US Federal Reserve kept the interest rate at 0-0.25%. The US Fed is doubling the reduction rate in its quantitative easing program to $30 billion a month. Fed officials forecast 3 interest rate hikes in 2022 and 3 interest rate hikes in 2023. The median forecast assumes an interest rate of 0.9% by the end of 2022, 1.6% by the end of 2023, 2.1% by the end of 2024, and 2.5% in the long term. The Fed raised its US inflation forecast for 2021 to 5.3% from 4.2% and expects inflation of 2.6% in 2022 and 2.3% in 2023.

The negativity of the last few days has been precisely related to these expectations, so this scenario has already been"in price." On Wednesday, American stock indexes demonstrated the most significant growth in the last week following the meeting of the Federal Reserve. By market close, the Dow Jones Industrial Average (US30) added 1.1%, the S&P 500 (US500) increased by 1.63%, and the Nasdaq Composite (US100) jumped by 2.15%.

Main from the Fed Chief Jerome Powell's press conference:

  • "I decided to accelerate the QE cuts because of higher inflation and much faster progress in employment."
  • "We plan to complete the cuts by mid-March."
  • "Don't expect a rate hike before the cuts are completed."
  • "We have not yet taken a position on whether we should pause between the completion of the cuts and the first rate hike."
  • "We believe the labor market will continue to strengthen."
  • "If the economy is not as strong as expected, we will adjust policy accordingly."
  • "If the economy slows, rate hikes will also slow down."
  • "The Fed may raise interest rates before full employment is reached."
  • "Omicron's impact on the economy will be determined by its impact on supply and demand."
  • "Even with Omicron, the economy is resilient enough to reduce bond issuance."
  • "We will use all of our tools to support the labor market and prevent higher inflation from taking root."

In November, the US retail sales increased by 0.3% for the previous month (0.8% growth was expected).

European stock indices finished the trading without a single dynamics. German DAX (DE30) added 0.2%, French CAC 40 (FR40) increased by 0.5%, British FTSE 100 (UK100) decreased by 0.6%, and Spanish IBEX35 (ES35) lost 1.1%. Today, the Bank of England, the ECB, and the Swiss National Bank will report on monetary policy. Analysts believe the Swiss National Bank will keep the lowest rate globally at -0.75% since inflation in the region is not high, and the Swiss franc looks stable. The Bank of England is likely to postpone an interest rate hike for next year due to restrictions imposed across the country due to a sharp rise in the incidence, particularly Omicron. The European Central Bank, as usual, will try to get out of the emergency stimulus regime without tightening monetary policy.

Most analysts expect that the ECB will not cut monetary stimulus to the economy until at least 2023. Meanwhile, in France, consumer prices increased to 3.4% in annual terms in November, the highest level in 13 years. In Spain, inflation accelerated to 5.5% in annual terms (5.4% in October), the highest level since 1992. Norway's central bank is considering raising the interest rate. Faced with the highest inflation rate since 2007, Hungary's central bank also plans to raise its prime rate by 30 basis points to 3.6%.

According to a weekly report from the US Energy Department, the US crude oil inventories fell by 4,584,000 barrels last week. This sharp decline in inventories led to a jump in oil prices. WTI crude oil increased by 0.23%, and Brent crude oil increased by 0.22%.

Gold prices were unpredictable at the US Federal Reserve meeting. Initially, gold prices started to decline sharply, but within 30 minutes, they came back and now are showing strong growth. However, analysts are confident that this growth is temporary because with the reduction of the QE program, the dollar index and government bond yields will have growth dynamics in the medium term, which will undoubtedly lead to a decline in gold prices.

Asian stock indices are trading flat today. Japan's Nikkei 225 Index (JP225) added 2.13%, Hong Kong's Hang Seng Index (HK50) increased by 0.22%, and Australia's ASX 200 Index (AU200) decreased by 0.43%. Reserve Bank of Australia Governor Philip Lowe said the central bank would not raise interest rates until inflation will steadily be in the 2-3% range, which is unlikely to be expected next year.

Main market quotes:

S&P 500 (F) (US500) 4,709.85 +75.76 (+1.63%)

Dow Jones (US30) 35,927.43 +383.25 (+1.08%)

DAX (DE40) 15,476.35 +22.79 (+0.15%)

FTSE 100 (UK100) 7,170.75 −47.89 (−0.66%)

USD Index 96.35 −0.23 (−0.23%)

Important events for today:
  • - Australia Manufacturing PMI (m/m) at 00:00 (GMT+2);
  • - Australia RBA Gov Lowe’s Speech at 01:30 (GMT+2);
  • - Australia Unemployment Rate (m/m) at 02:30 (GMT+2);
  • - Japan Manufacturing PMI (m/m) at 02:30 (GMT+2);
  • - Switzerland SNB Interest Rate Decision at 10:30 (GMT+2);
  • - Switzerland SNB Monetary Policy Assessment at 10:30 (GMT+2);
  • - Germany Manufacturing PMI (m/m) at 10:30 (GMT+2);
  • - Eurozone Manufacturing PMI (m/m) at 11:00 (GMT+2);
  • - Eurozone Services PMI (m/m) at 11:00 (GMT+2);
  • - UK Manufacturing PMI (m/m) at 11:30 (GMT+2);
  • - UK Services PMI (m/m) at 11:30 (GMT+2);
  • - UK BoE Interest Rate Decision at 14:00 (GMT+2);
  • - UK BoE Monetary Policy Statement at 14:00 (GMT+2);
  • - Eurozone ECB Interest Rate Decision at 14:45 (GMT+2);
  • - Eurozone ECB Monetary Policy Statement at 14:45 (GMT+2);
  • - Eurozone ECB Press Conference at 15:30 (GMT+2);
  • - US Building Permits (m/m) at 15:30 (GMT+2);
  • - US Initial Jobless Claims (w/w) at 15:30 (GMT+2);
  • - US Philadelphia Fed Manufacturing Index (m/m) at 15:30 (GMT+2);
  • - US Industrial Production (m/m) at 16:15 (GMT+2);
  • - US Manufacturing PMI (m/m) at 16:45 (GMT+2);
  • - US Services PMI (m/m) at 16:45 (GMT+2);
  • – US Natural Gas Storage (w/w) at 17:30 (GMT+2).

by Justforex, 2021.12.16

We advise you to get acquainted with the daily forecasts for the major currency pairs.

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

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