Markets Today: Will US Fed announce a tapering despite weak GDP numbers?

 Will Fed chair Jerome Powell pull start reducing monetary supply even though GDP numbers for the September quarter were weak and inflation remains sticky?

The US Federal Reserve will announce the outcome of its two-day monetary policy meeting later today. Fed chair Jerome Powell is expected to approve plans for scaling back its current $120-billion in monthly bond purchases. And this could be the first step away from the core policies put in place in early 2020 to battle the economic fallout from the Covid-19 pandemic.

According to Jan Lambregts, managing director and global head of financial markets research at Rabobank International, the Federal Reserve is expected to announce the start of tapering at its November meeting, where the central bank could announce a fixed monthly taper schedule that would reduce net asset purchases by $10 billion Treasuries and $5 billion agency mortgage-backed-securities.

He also anticipates the Fed to stress on accumulated progress in the labour market and the transitory nature of supply side bottlenecks.

But, given that the pace of price hikes has remained higher for longer than expected along with the United States' economy growing at a slower pace in the September quarter, market watchers are expecting a rate hike not before the second half of 2022.

According to the CME Group's FedWatch tool, a widely tracked derivatives marketplace in the US, trading in federal funds futures contracts indicates a greater than 65% probability that the Fed would raise rates in June, with a second increase expected in November.

A month ago, rates market indicators signalled less than 20% likelihood of a rate hike as early as June and a comparably negligible probability for two hikes next year.

G Chokkalingam, founder and chief investment officer at Equinomics Research, says a rate hike would happen only in the second half of 2022 calendar year. He cites as the reason the weak GDP numbers in the September quarter. “Central banks are concerned about markets. Fed and others would adopt phased-exit route from a liberal policy. They may reduce bond purchases by 5-10% every month. There will be no major impact on markets,” he adds.