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November 4, 2021

Powell Speech: Fed Begins Tapering But It's Transitory

Bart Kurek

Yesterday we had the FOMC Press Conference presented by Fed Chairman Powell. It's among the primary methods the Fed uses to communicate with investors regarding monetary policy. It covers in detail the factors that affected the recent interest rate and other policy decisions, along with commentary on economic conditions such as the future growth outlook.

The Federal Open Market Committee made the decision to keep interest rates unchanged as expected, and finally announced the beginning of the reduction in asset purchases by $15B/month. The Fed will begin tapering later this month with a reduction in Treasuries purchases by $10B, and mortgage-backed securities by $5B.

Also, policymakers still think inflation will be "transitory" although Powell noted that supply chain issues will likely extend into next year, meaning inflation will also remain high. He also said he would not want to surprise markets by changing the taper strategy, opposite to the statement that noted they can adjust the strategy as needed.

Let's look at some key quotes from his policy outlook:

  • "By many measures, we are in a very tight labour market"
  • "The issue is, how persistent is the labor market tightness, given it's due to Covid"
  • "It is clear we are set to go up to a higher employment level"
  • "We need to be ready to act if we have to"
  • "It is appropriate to be patient on jobs and inflation"
  • "Transition away from goods could bring inflation down"
  • "We want to see the process unfold to gauge true state of the economy"
  • "We think time will tell us more"
  • "Now is not the time to raise rates"
  • "If we need to raise rates, we'll be patient but not hesitate"

XAU/USD Analysis:

Price has begun to form a bearish flag pattern prior to the FOMC meeting. We saw a bearish rally from September onwards, followed by a retracement period where price formed an ascending channel and last week we saw a break of this channel. Price quickly retested the channel's bottom, and yesterday before the Fed's Funds Rate and Press Conference, we saw price rally downwards and head to new recent lows at 1760. Usually, with a strong rally in either direction, price usually fills the gap and so far we can see price retracing its move and staying around 1778.

Further macroeconomic data to look out for is the NFP report on Friday the 5th of November. Following the terrible September headline number of 194K, the country is expected to have added 455k new job positions, dropping the unemployment rate by 0.1% to 4.7%. This should strengthen the dollar and a continued bearish move on Gold is likely, potentially completing the bearish flag pattern towards 1725. Ofcourse, look out for the results and make your own judgement before blindly entering the market.

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