The US Federal Reserve has begun to phase out an unprecedented quantitative easing program launched amid the coronavirus pandemic, in which $ 4.4 trillion of additional liquidity was pumped into the system over a year and a half.
As reported at the Fed meeting on November 3 Jerome Powell, monthly transaction volume will decline from $ 120 billion to $ 105 billion and then continue to fall at a rate of $ 15 billion each month. The volume of redemption of Treasury bonds from the current $ 80 billion a month will decrease by 10 billion every month, and mortgage bonds (now 40 billion) – by 5 billion. As a result, by June 2022, the flow of additional dollars will stop to zero.
True, the decision of the FOMC cannot be called completely “hawkish”, since it did not begin to raise the interest rate and, as Powell promised, is not even preparing for this yet. Although the opinions of the committee members were divided, in the end it was decided that inflation, although it turned out to be more stable than expected, was temporary in nature and would return to 2% in the near future.
“Our decision today to start cutting back on asset purchases does not imply any direct signal regarding our interest rate policy. We continue to formulate another, stricter test of economic conditions that must be met before raising the federal funds rate, ”the statement said.
Markets are not yet too sure about these words – futures are laying a 64% chance of a rise in June 2022. In the meantime, the rates remain at a record low level of 0-0.25% per annum (for comparison, in Russia it has already risen to the level of 7.5%, and this is probably not the limit).
Traditionally, a decrease in dollar liquidity leads to an increase in the “American” rate and a fall in developing currencies. But, according to analysts, the Fed’s decision was expected, therefore, there were no special movements in the market. The dollar exchange rate on the Moscow Exchange by noon on November 4 was 71.73 against the dollar and 83.82 euros. However, this does not mean that nothing threatens the ruble.
FxPro Lead Analyst Alexander Kuptsikevich believes that since now we are not talking about the complete curtailment of the American program of quantitative easing, but only about reducing its scale, the ruble will weaken by the end of the year, but insignificantly.
– The Fed has announced the start of rolling back bond purchases to the balance sheet. Now announced a reduction in purchases by 15 billion per month. That is, 105 billion will be bought out in November against the current 120. A decrease in the scale of support should not be confused with a tightening of policy. Now in the United States, we see exactly the first. While Powell once again made it clear that the markets hold back the horses with the expectation of a rate hike.
Assurances that the Fed will not rush to raise rates have supported short-term demand for shares. Earlier, the ECB and the Bank of Japan also assured the markets that they would not rush to tighten policy.
However, the ruble has something to worry about, as the global economy is experiencing a slowdown in growth. And this is already hitting the commodity markets, transferring them to another stage. Energy prices retreated from their highs despite gains in equities. So the ruble is entering a period of corrective pullback against the dollar and the euro after impressive dynamics since the beginning of the year.
You should not be surprised if the pressure on the ruble continues until the end of the year, which will return it to the 73-74 region, where purchases of the Russian currency may again be attractive. The euro / ruble is also marching powerfully upward, and this pullback may remain strong up to the 84-85 region. However, this correction should not break the general long-term trend for the growth of the ruble due to the continued increased demand for raw materials and energy and the soft monetary policy of the largest central banks as opposed to the tight monetary policy in Russia.
Financial analyst Dmitry Golubovsky warns that the real tightening of the US Federal Reserve’s policies will begin next spring, and that is when the ruble may face significant problems.
– Taking into account the volume of the curtailment of the program, the printing press will be stopped by the middle of the summer. This does not mean that the Fed’s balance sheet will begin to sag as some reinvestment activity will continue. You need to understand that the money is not getting smaller, no one is taking it, but it will be given more slowly. The money supply in the United States will come out at a constant amount by the middle of next year.
This is all in line with market expectations and experts’ forecasts. Powell did exactly what the market wanted from him, therefore, as you can see, nothing much happened, the exchange rates remained almost unchanged. At his press conference, which was quite mild, he confirmed that they are not even discussing a rate hike yet.
On the soft tone of his interview, the dollar has weakened a little, but now that weakness is going away because the pace of the printing press is in favor of the American currency. And, as practice shows, after the FRS meetings, the dollar tends to grow for about two weeks.
In this case, the dollar will also strengthen in the next few weeks. Although it will not be very strong, since the question of rates remains in the air.
“SP”: – And what will happen then?
– Then the yield on the dollar debt market will begin to stabilize. The trend of growth in yield and strengthening of the dollar, which began in the middle of summer, followed the event that happened yesterday. Moreover, this process has already begun and an interesting phenomenon is observed there, when the yield on 30-year bonds turned out to be lower than 20-year ones. This is a sign that investors have confidence that the Fed will cope with inflation in the long run.
As the yield stabilizes, the dollar exchange rate will stabilize. This process is not quick, it will take the entire December, after which the dollar will start to weaken, and the euro – to grow on expectations that the ECB will also begin to reduce its quantitative easing programs.
In the near future, we will continue to grow stock indices, there will be a Christmas rally. Risk demand will remain at an elevated level, which is good for risky assets, including the ruble. Therefore, there will not be any significant drop, it will stabilize at the current levels for a month or two. After that, even devaluation tendencies may begin to develop.
But in the same way, the ruble can sink. We must not forget that everything is turbulent in the foreign policy arena, the unstable situation in Donbass. Now the ruble has bounced from 69.5 to 71.5. In the same way, it can go up two more rubles and reach 73.5 against the dollar. Especially if the oil is pushed lower.
From a more global perspective, the Fed’s decision is positive for the US, but not very good for developing countries. Whenever dollar liquidity starts to shrink, they start to suffer. But, as I said, so far no one is taking the money, so this negative will be very moderate.
“SP”: – Including for the ruble?
– Yes, but the ruble has its own history. Political instability does nowhere. Let me remind you that when the negotiations between Vladimir Putin and Joe Biden were held, the latter said that he would give Russia six months to see how it would “behave.” These six months end in December. Accordingly, foreign policy instability may begin.
In this sense, I do not expect anything good from the ruble. But I would not make too pessimistic forecasts either. In the range that the ruble entered, which is 71-73 per dollar, he will live in it.
But these are only short and medium term prospects, next year the picture will be completely different.
“SP”: – What will change?
– In February, Jerome Powell will be re-elected for a final term, and the final term means that he will have nothing to lose, and it will be possible to do what the situation requires. And it requires a tightening of monetary policy. Therefore, we will see the real tightening somewhere in the spring of next year.
Around April, a strong upward trend in the dollar will begin. But these will not be the consequences of yesterday’s decision, but the result of their correction towards tightening, when the market will be clearly signaled that they will face two rate hikes in 2022.
In addition to the Federal Reserve elections, the US has additional congressional elections, and no one will bring down the market during the elections, otherwise they will not be re-elected. But when the political moment passes, it will be possible to get down to business, including the fight against inflation. The stock market will collapse next year, according to tradition, they can do it in May, the month of sales.
There will be no catastrophic fall, but there will be strong shaking in the spring. We will end this year relatively calmly. I expect growth from the American market, from the Russian market – a recovery after sales, and the ruble will remain approximately at the current level or weaken a little if there is a political reason for this.