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FOMC; Federal Reserve Policy Statement and Interest-Rate Projections

They will focus intently on the most recent Federal Reserve policy statement and the newly updated interest rate projections vis-à-vis the “dot plot” which will give projections through 2024.

The statement will give insight for one of the biggest questions that might be answered, whether or not the Federal Reserve will give clarity to the current proposed timeline and commencement date in which the Fed will begin to taper its monthly $120 billion asset purchases. Currently, the Federal Reserve purchases $80 billion of U.S. debt and $40 billion of MBS (mortgage-backed securities) every month.

During the banking crisis and subsequent recession of 2009, the Federal Reserve accumulated an asset balance sheet of roughly $4.5 trillion. At the end of their “quantitative easing.” (QE1 through QE4) they began to liquidate assets and took their balance sheet down to $3.75 trillion before they felt a further reduction would harm the economic recovery. This new round of “quantitative easing” has caused their balance sheet to exponentially swell, and as of September 15, the Federal Reserve has amassed $8.4 trillion in assets.

2005 to present fed balance sheet

Analysts are mixed as to whether they believe that the Fed will announce the start of tapering its asset purchases tomorrow. The majority of analysts currently believe an announcement will come in November, and tapering could begin as early as December 2021. However, the devil is in the details in that an announcement of a starting date to taper is only a component that market participants want and need to gain clarity on. It is also of interest how quickly they will taper and how much they will reduce their purchases monthly.

Recent statements by top Federal Reserve officials have clearly shown division between voting members as to when to begin the process of ending quantitative easing. A unanimous consensus will be difficult at best, however, if they come to a consensus and make an announcement tomorrow is that the start date that will result in bearish market sentiment for gold prices. Reciprocally if no announcement is forthcoming in either tomorrow’s Fed statement or Chairman Powell’s press conference which occurs roughly ½ an hour after the conclusion of the September FOMC meeting it will be interpreted as a much more dovish demeanor and therefore provide bullish tailwinds to take gold higher.

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Just as important is the release of their updated interest rate projections. Not only will Powell give clarity as to when the Fed will begin to normalize rates, but it will also indicate the level of division between Fed officials. Lastly, it will be the first time that market participants gain clarity as to the interest rate projections for 2024.

While market participants may gain clarity as to the intentions of the Federal Reserve removing some of the uncertainty that currently exists, it will magnify the volatility in many financial markets as analysts glean the statement for changes from the previous FOMC statement looking for the nuances and phrasing of their current economic outlook.

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Wishing you, as always, good trading and good health,

Gary Wagner