FOMC meeting caps off a busy September of central bank reports

The Federal Open Market Committee (FOMC) is set to meet for two consecutive days, September 2122, at the end of which investors will have a better picture of the Fed’s plan for future interest rates and its outlook for asset purchases.

Last FOMC Meeting

In mid-August, the minutes from the July FOMC meeting were released. From the minutes, there was an indication that should the economy evolve as expected, it would be appropriate to begin considering tapering asset purchases.

It stated: “Looking ahead, most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year because they saw the Committee’s `substantial further progress’ criterion as satisfied with respect to the price stability goal and as close to being satisfied with respect to the maximum employment goal.” 

However, the exact time frame was not agreed upon. Though some members of the FOMC saw the possibility of tapering asset purchases in the coming months, others forecast that it would only happen in the coming year.

Participants in the meeting also noted that even when it is decided to reduce asset purchases, it is important to emphasise “the absence of any mechanical link between the timing of tapering and that of an eventual increase in the target range for the federal funds rate.”

The importance of the FOMC and Central Banks’ reports

The FOMC meeting as well as other major central banks’ reports are important events for investors. Changes in interest rates can affect mortgage loans, overnight loans, foreign exchange rates and more. Therefore, any monetary policy statement, speech, press conferences or any other statement by governors of central banks are all followed closely by investors who look to analyse what the statement could mean for future policies.

It would not be an overstatement to say that analysts follow and scrutinise every word from global central banks trying to glean even the smallest insight.

Take, for example, a monetary policy statement released by the Reserve Bank of Australia (RBA) in July 2021 in which erasing three words from a previous statement raised many eyebrows. In previous statements, RBA Governor Philip Lowe said a raise is “unlikely until 2024 at the earliest.” However, in the July statement, he dropped the words “at the earliest” and the phrase was simply that a raise is “unlikely until 2024.” Financial commentators following these statements surmised that what had previously been a promise by Governor Lowe to keep the rates as they are until 2024, was now merely a forecast of how he saw things playing out, but could certainly change.

Purpose of Central Banks

While each central bank defines its mission slightly differently, there are common denominators. 

One of the main goals of central banks is to make sure that the currency is stable and retains its value. A second goal is to set policies that will facilitate economic growth and full employment. 

To achieve these goals, central bank committees meet at various times of the year to decide on monetary policy. For example, the FOMC meets eight times a year. In addition, the European Central Bank, Bank of Canada and Bank of England also set their interest rates eight times a year, whereas the Reserve Board in Australia sets its rates eleven times a year.

A busy month of central bank reports

September 2021 has already seen various central banks’ reports. On September 7th, the Reserve Bank of Australia released its rate statement. On September 8th, the Bank of Canada released its rate statement and on the same day, the Bank of England Governor, Andrew Bailey, and Monetary Policy Committee members testified before the UK Parliament Treasury Committee. On September 9th, the European Central Bank released its monetary statement followed by a press conference given by ECB President, Christine Lagarde. 

RBA stands firm on interest rates

In his monetary policy decision statement, Reserve Bank of Australia Governor Philip Lowe said that the board had decided to maintain the short-term interest rate, also known as the “cash rate target,” at 0.1%, and the interest rate on Exchange Settlement balances at 0%. Furthermore, it would continue the target of 0.1% for the April 2024 Australian Government Bond, and purchase government securities at a rate of 4 billion AUD a week until at least mid-February 2022. 

The decision to reduce purchases of government securities from five billion AUD to four billion AUD beginning in September, was announced in the August 2021 monetary policy decision. However, in this latest statement, purchases at a rate of 4 billion AUD per week will continue at least until February as opposed to the November date mentioned in last month’s statement.

Lowe also mentioned that the Delta outbreak will slow economic growth, but will not derail it. However, the forecast for economic growth remains unclear.

The immediate impact of the RBA’s statement was that the Aussie dollar rose on the news of the planned reduction of bond purchases, however, those gains were lost after the bank reiterated that there would have to be much higher inflation for it to be able to raise interest rates. 

Bank of Canada holds interest rates

In its rate statement, the Bank of Canada (BoC) cited global economic recovery continuing in the second quarter and solid momentum entering the third quarter, however, supply chain disruptions and rising Covid-19 cases could hinder continued progress. While the Canadian economy’s second quarter was weaker than anticipated, the poor performance was not seen across all sectors. The BoC expects the economy to strengthen in the latter half of 2021, but an increase in Covid-19 cases and supply bottlenecks could hinder the recovery.

The Governing Council of the BoC assessed that the Canadian economy: “has considerable excess capacity and that the recovery continues to require extraordinary monetary policy support,” and, thus, decided to hold its target overnight rate of 0.25%, called the lower bound. The council predicted that this rate will continue until the second half of 2022 when “economic slack is absorbed” and the 2% inflation target is achieved. The BoC will also continue with its quantitative easing program by purchasing bonds at a rate of $2 billion (CAD) per week.

The immediate impact of this statement was that the S&P/TSX composite index dropped 64 points and the loonie, which is a nickname for the US dollar versus the Canadian dollar currency pair (USDCAD), also fell.

Bank of England’s Bailey worried about labour shortages

Like his colleagues in Canada and Australia, Bank of England Governor, Andrew Bailey, mentioned that the economy was slowing down due to a resurgence in Covid-19 cases and a supply chain shortage. In his testimony on September 8th, in front of the Parliament’s Treasury Committee, Bailey stated that he believes that commodity prices will eventually return to normal as over time, the shortage in supplies will decrease. However, he did express concern over the shortage in the labour market which could generate rising inflation for goods and services.

Bailey also said that it was likely that the bank’s Monetary Policy Committee would have to raise interest rates in the coming years to combat inflationary pressures. An interesting revelation came when he told British MPs that the committee had been split 4-4 on the question of whether England’s economy had recovered enough to begin scaling back emergency measures and raising borrowing rates.

ECB continues monetary policy, slows pace of asset purchases

After a week in which Australia, Canada and the UK all discussed their economic policies, all eyes were on the European Central Bank (ECB) and their report on September 9th. ECB’s Governing Council decided to keep the main refinancing operations’ interest rate at 0%, the marginal lending facility at 0.25% and the deposit facility at -0.5%. 

The Governing Council mentioned that it expects the key ECB interest rates to stay at their current or lower levels until it sees inflation reaching 2% “well ahead of the end of its projection horizon and durably for the rest of the projection horizon,” and based on the council’s assessment that “progress in underlying inflation” is on par with inflation stabilising at 2%. The ECB Chief Economist believes this will happen by 2025.

ECB’s statement says that monthly net purchases under the Asset Purchase Program will continue at a pace of 20 billion. Under the Pandemic Emergency Purchase Programme (PEPP), total asset purchases will remain at 1.85 billion and continue until the end of March 2022 at the earliest. However, the pace is expected to change. Based on the financing conditions and inflation outlook, the ECB said that “favourable financing conditions can be maintained with a moderately lower pace of net asset purchases.”

All eyes on FOMC

While each Central Bank report had various nuances, there were some general commonalities.  

  • Australia, Canada and the ECB all held their interest rates. 
  • Although the ECB will not be tapering asset purchases like the RBA, the pace is expected to be moderately lower. 
  • There is concern about the economy, although growth is expected to continue, the timeline remains unclear.

With some of the major global economies having their say, the focus now shifts to the FOMC meeting and statement to be released on September 22.