FED's Hawkish Monetary Policy Under Dovish Disguise

Although the Fed remained the monetary policy unchanged as expected and reiterated in its post-meeting statement that it would pin the rate for the long term, which seems to be dovish, it takes hawkish actions instead. First of all, the Fed sharply raised its economic forecasts with the median of projections for GDP growth up to -3.7% for the end 2020 (-6% for June projection), the median PCE (personal consumption expenditure) inflation rate ending 2020 at +1% and the median core PCE inflation ending 2020 at +1.5%, which are both higher than PCEs of June projection.

The bitmap shows that the interest rate will remain at current levels until 2023, that is, the rate is likely to increase in 2024. The DXY staged a rally despite the Fed's reiteration of long-term low-interest rate both because of the sharp increases in economy and inflation projected by the Fed and the chance for the interest rate to rise in 2024. However, most analyses lose sight of the implication that the Fed will scale back quantitative easing (QE) prior to the rate increase. Taking the last rate-hiking cycle for reference, the U.S. embraced the cycle at the end of 2015, before when the Fed successively ended QE, lifted interest rates, and shrank the balance sheet.

In 2013, as the U.S. gained strength in the broader economy, the rumors that the Fed was going to cut back QE seized the financial market in Q1. The DXY thus was gearing up for a soar. At the end of 2013, the former Fed Chair Bernanke eventually announced to begin Fed's tapering of QE, resulting in the dollar price jumping from $80 to $100. After the statement, the financial market predicted that a rate-raising cycle was just around the corner, which at last triggered at the end of 2015. Considering that the period from the tapering of QE to the occurrence of the cycle is just two years, the Fed may start the tapering early in 2022 if it sets to inspire the rate in 2024.

Notably, the financial market will hype the tapering in advance before it happens, which lasted for nine to ten months in 2013 according to the process mentioned above. In other words, next year is expected to see rumors of the U.S. tapering of QE in Q1 & Q2. With that said, investors should never be under the misapprehension that the greenback won't rise until the rate gets higher in 2024. The rate just increased at the end of 2015 even though the dollar had been poised for aggressive growth since early 2013.