The Fed announced the acceleration of tapering because inflation is getting out of control and the labor market is approaching full employment. Meanwhile, interest rates are likely to rise 3 times in 2022.
In the policy announcement early this morning (16/November), the Federal Reserve kept its benchmark interest rate at the lowest level of 0.25 percent, in line with previous market expectations. The Fed also confirmed an accelerated tapering rate in response to a spike in inflation that hit a recent record high.
In his statement, Fed chairman Jerome Powell said that policymakers (FOMC) agreed to reduce bond purchases to $30 billion per month. This figure is more than double the previous tapering rate of $15 billion per month.
"The US economy no longer needs loose policy support," Jerome Powell said at a news conference after announcing interest rates. Powell also added that the US economy has recovered very quickly compared to the first half of 2020; when the pandemic first spread in the US.
"Inflation is already very high and in my view, the US labor market is now getting closer to full employment... This condition makes even the most dovish Fed officials agree to start moving out of accommodative policies," said Powell.
Apart from the accelerated rate of tapering that the market had anticipated, the Fed also hinted at the prospect of a more aggressive rate hike of three in 2022. Regarding the projected interest rate, the Fed estimates that the rate will increase to 1.6 percent in 2023.
US Dollar Impacted Profit-Taking
After the announcement of the Fed's very hawkish monetary policy in December, the US Dollar was observed to weaken against major currencies. This condition is reflected in the movement of the Dollar Index (DXY) which is in the range of 96.32, down 0.24 percent from the daily open price.
The weakening of the US Dollar was due to the phenomenon of "Buy The Rumor, Sell The News", where investors simultaneously liquidated Long USD positions that had accumulated amid rumors of the Fed's accelerated tapering. However, analysts expect the US Dollar to strengthen again in the medium term as the Fed tightens.
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