The upcoming Federal Open Market Committee (FOM0C) meeting, November 2-3, 2021, is seen as an important policy gathering because the Fed is expected to officially announce its QE tapering program after sending signals that it would begin to do so by the end of 2021 and complete the process by mid-2022. This means that the Fed will likely start to gradually scale back its asset purchases at USD15 billion a month, which comprises the reduction in government bond purchases by USD10 billion a month, from the current purchase amount of USD80 billion a month. Additionally, it will cut its purchases of mortage-backed securities at USD5 billion a month, versus the current purchase limit of USD40 billion a month. As a result, the Fed is expected to complete its USD120-billlion a month QE tapering by mid-2022 as signaled.
The Fed's major concern is accerating inflation as it is projected to persist longer than previousely anticipated. Although the QE tapering program may not be effective in addressing inflation problems because inflationary pressure has partially been driven by supply-side factors, which are responsible for rising manufacturing costs, the Fed's exit from its accommodative monetary policy stance via the QE tapering program may ease inflation expectation and supply-side inflationary pressure. This will in turn help curb inflation somewhat. Looking ahead, the US economic growth momentum is set to slow down because of a shorage of labor and risks stemming from the high number of COVID-19 infections while inflationary pressure will likely persist longer than our prior estmiate. Given this, the Fed may have to weigh both economic and inflation risks when considering an appropriate timing for its interest rate hikes.
As the financial and capital markets have already priced in the Fed's plan to begin its QE tapering program, there will likely be limited volatility within such markets once the Fed officially anounces such plan at the upcoming FOMC meeting. However, close attention must be paid to new signals from the meeting. If the Fed signals that there are increased downside risks to the US economy, markets may expect that interest rate rises will likely be postponed from the projected schedules, and this may cause the greenback to weaken. If the Fed signals that it is more concerned about inflation than economic risks, markets may expect that interest rate hikes will be coming sooner than anticipated, thus causing the US Dollar to strengthen. Meanwhile, the Baht is projected to be volatile in line with the greenback and domestic factors.