FX.co ★ Fed may start reducing its balance sheet as early as September

The result of the Fed meeting showed that the bank's previous views on the prospects for inflation have changed, despite the fact that the regulator's resolution, reflecting the Central Bank's decision on monetary policy, did not bring anything new.

For the first time in recent years, the Federal Reserve has decided to raise the interest rate on excess reserves from 10% to 15% points. As expected, the key interest rate itself remained unchanged in the range from 0.0% to 0.25% The regulator only noted the progress in the vaccination process against COVID-19 and mentioned that inflation is growing. That is all.

As usual, the statements of the Head of the US Central Bank, Jerome Powell, at a press conference after the meeting contained the most important thing. In our view, what was important was his assertion that the observed upward price pressure from the spending recovery could become sustainable. This indicates that the situation around a noticeably stronger-than-expected increase in inflation does not correlate with the Fed's forecasts, which were made back in the winter of this year.

This indicates that the bank itself is changing its attitude towards prospective changes in the course of monetary policy. This means that there will be a decision in the fall to start reducing the balance once the Fed observes the dynamics of inflation, which may last until September of this year. In other words, the bank will make a decision on the process of smooth normalization of monetary policy by reducing the volume of redemption of government bonds. It can be recalled that assets are being repurchased in the amount of $ 60 billion at the moment.

The US stock market reacted to the results of the Fed meeting with a decline in major stock indices, as well as a sharp strengthening of the national currency. The ICE dollar index noticeably accelerated, confidently consolidating above 91 points and added 0.38%, that is, to 91.54 points.

The US government debt market also reacted strongly to the news from the Federal Reserve with an increase in the yield of Treasuries amid bond sales. So, the yield of the benchmark 10-year Treasuries was at 1.567%, slightly correcting down after yesterday's growth.

As for the currency market, there is a general strengthening of the US dollar. We expect that the market will continue to win back positive news for the US currency today.

Forecast of the day:

The EUR/USD pair is under the strongest pressure. It is expected to decline to the level of 1.1900.

The USD/CAD pair is consolidating below the level of 1.2290. It is possible to buy the pair after it rises above this level with a target of 1.2385. The pair is supported not only by the strengthening of the US dollar but also by the weakening of crude oil prices.