22.09.202112:15 Forex Analysis & Reviews: Five points that determine the Fed's future strategy

The US currency found itself at a crossroads again, entering a consolidation phase. This currency is stuck between choosing the nearest direction, which depends on the Fed's actions.

It is worth noting that the US dollar has been relying on the Fed for quite a long time, but now, the situation has worsened. The recent meetings of the regulator, which discussed the need to curtail incentive programs and the timing of the launch of these measures, worsened the situation. It can be recalled that Fed representatives began a two-day meeting on Tuesday, which considers the prospects for employment and inflation in the United States. The key moment of the meeting will be the development of an up-to-date strategy that will encourage the central bank to reduce fiscal support.

The current situation puts pressure on the dollar, who seeks to maintain balance. Its efforts were successful as it stabilized against other currencies on Tuesday evening and the next day, being near a monthly high. On the morning of Wednesday, the EUR/USD pair hardly left the borders of the 1.1726-1.1727 range. Experts are confident that the US dollar will remain within this area until the current Fed meeting.

Before the meeting of the Federal Reserve members, the markets were tuning in to the fact that the end of quantitative easing (QE) programs will be announced at the FOMC's September meeting. However, American disappointing macroeconomic data, in particular low inflation and a weak employment report, are hindering the reduction of QE. According to economists, this measure will be implemented this year, but much later. Experts pay attention to 5 key points that Fed members rely on when making a certain decision.

1. Is progress possible?

During the implementation of a particular measure, it is important for the regulator to know whether it will contribute to progress in the economy. For example, the Fed planned to cut monthly purchases of Treasury bonds and mortgage-backed securities in the amount of $ 120 billion, until there is "significant progress" in achieving maximum employment and the target inflation rate of 2%. At the same time, Fed Chairman Jerome Powell said that the corresponding inflation target has already been reached, although the desired progress is still far from being achieved in the employment sector. The combination of these circumstances increases the chances of reducing the bond purchase program by the end of this year.

2. Analysis of the FRS dot plot

Representatives of the regulator intend to separate the current decision to reduce asset purchases from a possible rise in the discount rate from almost zero. At the same time, many analysts believe that the Federal Reserve will keep the interest rate at the level of 0-0.25% per annum. Fed representatives rely on a dot chart, according to which key decisions on the rate and the curtailment of incentives can be made in 2022. ING Bank's currency strategists believe that the median point chart for the next rate hike will shift from 2023 to 2022. It can be recalled that at the beginning of the summer, many members of the Federal Reserve assumed to maintain the same level of rates until 2023. "The current situation will support the recent statements of J. Powell said that the link between the tapering of QE and the tightening of monetary policy will be broken, and will also limit expectations for rates. But against this background, the US dollar may weaken, and pro-cyclical currencies will benefit," ING emphasizes. It should be noted that the current meeting is the first at which forecasts for 2024 will be announced.

3. Debate over the US debt ceiling

The third important issue is the problem of America's public debt, the increase of which threatens the country's monetary system. According to preliminary estimates, the country may run out of funds to pay bills by October 1, and this will paralyze the work of operating funds. Experts warn that the aggravation of the situation will lead to a partial shutdown of the government. According to Janet Yellen, the US Treasury Secretary, a default resulting from financial instability will excite the markets, plunging the country into recession and cause significant damage to the US economy.

4. Changes in the Fed's leadership

Experts consider the current meeting of the regulator to be the last, which is headed by J. Powell. Many are inclined to believe that the Fed will soon be headed by a new chairman. Currently, the Fed's Vice-Chairman is Randal Quarles, whose term in this post expires on October 13. He may remain at the head of the Federal Reserve, but experts expect that President Joe Biden will put another candidate at the financial helm of the country. At the same time, the head of state needs to decide on the further appointment or resignation of J. Powell.

5. Compliance with market ethics

Proper regulation and maintaining a balance in solving general market and domestic economic issues are the basis of a stable monetary strategy of the Fed. The wide range of financial transactions that the regulator deals with covers not only the American economy but also global markets. The connection between them is obvious. For example, the US stock market collapsed due to fears of a potential default of the Chinese developer China Evergrande Group. Experts believe that this will destabilize global financial markets in the future. In such matters, the Fed needs to take into account the interests of all parties and maintain an economic balance.

The commotion that the Evergrande debt crisis brought to the financial markets has shaken the US dollar. Earlier, the US currency received strong support before the Federal Reserve meeting and is now holding on due to this momentum. According to economists, the regulator is able to postpone the deadline for curtailing quantitative easing (QE) programs to November, which will once again destabilize the currency. It should be noted that the second obstacle in this issue was December 2021.