Fed’s minutes reveal the future of bonds

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According to the published minutes from the Federal Open Market Committee (FOMC) meeting, which took place on 21 and 22 September 2021, the central bank could start to reduce the rate of monthly asset purchases as early as mid-November 2021. At the same time, FOMC members expressed concerns regarding rising inflation, which could take longer than expected. In response to this announcement, the exchange rate of the US dollar (USD) continued to decline slightly.

On 14 October 2021, at 8:11 am CET – according to the US Dollar Currency Index (DXY), which compares the value of the USD with the other six major world currencies – we have seen the USD at a price level of 94.03 USD points with the current daily decline of -0.05%. In this situation, the global currency pair of the single European currency, the euro (EUR) and the USD, traded at a mutual exchange rate of US$ 1.1594 per EUR, with the current daily appreciation of the EUR by +0.02% against the USD.

The minutes from the FOMC meeting, published three weeks after the meeting and issued on Wednesday, 13 October, suggested that the Fed’s gradual steps could lead to a treasury bills monthly reduction of US$ 10 billion and US$ 5 billion in mortgage-backed securities. Thus, according to the published minutes, FOMC officials could begin to reduce the emergency aid they provided to the economy as early as mid-November 2021. In this process, known as tapering, the Fed would reduce the $120 billion a month in bond buys slowly. The Fed is likely to start cutting US$ 10 billion a month in Treasurys and US$ 5 billion a month in mortgage-backed securities. At the moment the Fed buys at least US$ 80 billion in Treasurys and US$ 40 billion in MBS.

According to the FOMC, however, the target date for the end of purchases – in case of no disruptions – would be around the middle of next year. The minutes also noted “participants generally assessed that, provided that the economic recovery remained broadly on track, a gradual tapering process that concluded around the middle of next year would likely be appropriate.” The summary also said that “participants noted that if a decision to begin tapering purchases occurred at the next meeting, the process of tapering could commence with the monthly purchase calendars beginning in either mid-November or mid-December.” According to analysts, the decision will be made at the next FOMC meeting, which is scheduled for 2 November 2021. Financial strategists say that the tapering process during November or December 2021 will cause an aggressive reaction in the financial market.

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