23 September 2021
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FOMC keeps policy unchanged but nods towards tapering

By Edward Bell

  • The Federal Reserve kept its policy stance unchanged at the September FOMC meeting with rates unchanged at 0.25% on the upper bound but did note that a “moderation in the pace of asset purchases may soon be warranted,” giving a strong signal that they believe the economy has improved enough to sustain tapering. In his press conference after the release of the FOMC decision, chair Jerome Powell said that the Fed could being tapering in November and bring asset purchases to an end by mid 2022. The Fed also revised its economic growth forecast for 2021 lower and bumped up its unemployment rate forecast along with strong upward revisions to their 2021 projections for PCE inflation. They also explicitly acknowledged the recent rise in Covid-19 cases as a factor in slowing the economic recovery.
  • On the outlook for rates the outlook from the Fed was decidedly more hawkish with two more policymakers believing that rates could go up in 2022, according to the dots plot. Nine of the 18 FOMC members now expect to see rates rising next year, bringing the median projection for the Fed Funds rate in 2022 to 0.3% and up to 1% for 2023. Long-term projections for the Fed Funds rate are unchanged at 2.5%.
  • The UAE central bank has revised down its forecast for GDP in 2021 to 2.1% from 2.4% previously.  The downgrade was due to a larger expected contraction in the oil and gas sectors.  The central bank’s non-oil growth forecast remains unchanged at 3.8% this year, slightly higher than our 3.5% forecast.  For 2022, the UAE central bank expects non-oil growth to reach 3.9% (our forecast is 4.0%) while an increase in oil production next year should contribute to real GDP growth of 4.2%, slightly lower than our 4.6% forecast for next year.
  • The UAE’s CPI declined -0.1% m/m in July, the first monthly decline in prices since February.  Food and transport costs increased in July but were offset by lower housing, clothing and recreation & culture prices. The annual inflation rate was fractionally negative at -0.02% in July, and we expect this to move into positive territory in August after more than two years of decline.

Today’s Economic Data and Events

11:30 GE composite PMI Sept: forecast 59.2

12:30 UK composite PMI Sept: forecast 54.6

15:00 UK Bank of England bank rate: forecast 0.1%

15:00 TU One-week repo rate: forecast 19%

17:45 US composite PMI Sept: forecast 54.9

Today SARB interest rate decision: forecast 3.5%

Fixed Income

  • US Treasuries responded in a measured way to the FOMC statement, avoiding any kind of sharp sell-off or rises. Markets were well primed for an announcement that tapering would begin in November, which they have more or less received, while the earlier forecast for rate hikes in 2022 was surprising but not entirely out of the blue.
  • Yields on 2yr USTs did show more movement, adding 2bps to settle at 0.2363% while the 10yr fell by 2bps to move back to a 1.30% handle. With tapering now in play and a potential for rate liftoff next year, we could start to see more action at the shorter end of the curve before the end of the year.
  • Today it will be the turn of the Bank of England to outline policy at its MPC meeting. Yields on 10yr gilts edged slightly lower overnight and we expect this meeting will keep policy unchanged, even if the BoE could be the next major central bank to move toward tightening.
  • Emerging market bonds were again largely quiet overnight with more reaction to the Fed likely to come today. Yields on South African and Indian 10yr local currency bonds added a bit more than 1bps each.


  • After some initial hesitation currency markets did indeed accept that the Fed will be tightening policy likely as early as November and with the potential to raise rates in 2022. The DXY index added 0.28% to settle at 93.462, its highest level in around a month. The path for dollar strength would appear a bit more assured under Fed tightening, provided that economic or health conditions in the US don’t deteriorate.
  • EURUSD gave up 0.33% to push below 1.1687 in response to the Fed. While there has been a growing chorus of hawkish speakers from the ECB we still expect that the bank will be adding stimulus to markets from end of March next year when the PEPP expires. Compared with a tightening Fed that will set markets up for a softer Euro narrative. GBPUSD also dipped, falling 0.27% to 1.3622 ahead of the BoE later today. USDJPY gave back all of its recent risk-off losses and added 0.5% to settle at 109.78.
  • Commodity currencies managed to gain overnight with USDCAD down 0.37% at 1.2772 and AUD settling up 0.22% at 0.7247. However, they are now moving lower even as central banks in Canada, Australia and New Zealand have already begun or are signalling tighter policy ahead.


  • The nod towards tapering by the FOMC was not sufficient to derail the recovery in US equities in play in recent days, as the concerns over the potential fallout from the Evergrande crisis dissipated. All three major indices gained 1.0%, although only the NASDAQ is now higher than it was one month ago.
  • There was similar optimism in play in Europe, despite the gas crisis which is hitting countries such as the UK. The FTSE 100 was actually one of the biggest gainers, adding 1.5%, while the CAC added 1.3% and the DAX 1.0%.
  • In Asia, Shanghai Composite, reopened after holidays earlier in the week, managed to close 0.4% higher and is trading up another 0.5% so far this morning.


  • Oil prices jumped strongly overnight with Brent and WTI gaining around 2.4% each. Brent settled at USD 76.19/b while WTI closed at USD 72.23/b. Oil markets are responding positively to a general recalibration in risk appetite as well as a looming energy crisis in Europe where natural gas inventories are perilously low.
  • EIA data showed another draw in US crude inventories, down by 4.7m bbl although there were builds in gasoline stocks. Production is showing signs of recovery from earlier hurricane-related disruption with output adding 500k b/d to 10.6m b/d last week. Meanwhile, product supplied rose a strong 1.2m b/d last week to 21.1m b/d.

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Written By

Edward Bell Head of Market Economics

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