How China fears will weigh on FOMC meeting

Yahoo Finance’s Brian Cheung to discuss the likelihood of Evergrande fears impacting the Federal Reserve’s decision on easing asset purchases and expectations for the FOMC meeting.

Video transcript

ALEXIS CHRISTOFOROUS: Our Fed correspondent Brian Cheung joining us now. And I guess, Brian, the question is, is this going to deter what's happening in China, the Fed's decision to start rolling back its asset purchases?

BRIAN CHEUNG: Well, Alexis, the short answer is likely, no. That's because this story is still unfolding before our very eyes, and for the most part, this does appear to be a domestic issue over in China as opposed to something that could have severe spillover effects for the Federal Reserve, at least.

Now, of course, you're seeing US markets are teetered on this, because, again, this is a developing story and it remains to be seen to what degree they'll be able to meet their payments. Evergrande being, later this week, when they do have some of those bond payments due.

Of course, for the Federal Reserve, it likely seems that the train is still going with regards to their plan to start paring back the pace of asset purchases and their so-called quantitative easing program by later this year. The question is whether or not they will further advance those talks in this meeting and then ultimately, announce something in their next meeting in November.

That does seem to be the consensus view among many of the Fed watchers that I've been hearing from. Again, there are only three more meetings before the end of this year. The first one is going to be this week then we have one in early November and then one in the middle of December. So the question is, which one of those meetings will the Fed officially announce something in their statement that would point to the way that they would slow that $120 billion of pace of asset purchases?

Now interest rates are a whole another thing. Interest rates are expected to keep interest rates at near zero in that meeting this Wednesday. But, of course, what will Fed Chairman Jerome Powell say in his press conference. There's a lot of answers or rather questions with regards to the Delta risk, maybe in addition to the Evergrande, among a list of other things that the Fed chairman could be pressed on. Alexis.

ALEXIS CHRISTOFOROUS: All right, so if the Fed's not going to exactly rock the boat at this meeting, I do know that the dot plot is going to make a comeback and that's the Fed's forecast on interest rate hikes. What do you expect to see there?

BRIAN CHEUNG: Yeah, well, the trajectory, at least, since the last time we got a set of dot plot projections, which was in June, points to an economy that continued to recover. So if it is the case that just over the last three months, Fed officials did appear to see things progressing in a way that would advance their taper talks, then that likely points to maybe a more bullish attitude on their ability to raise interest rates as well.

So if you rewind, the median member of that 18-member committee saw the possibility of two interest rate hikes by the end of 2023. Could some of those interest rates hikes get pulled forward so that the median dot even shows a rate hike in 2022? That could be a possibility, which could be a little bit more of a hawkish signal than we saw in their June meeting.

But, of course, whether or not the Fed chairman downplays that, we know that the Federal Reserve is trying to de-emphasize the timing of a taper to eventual lift-off. That could be a challenge for financial markets that may have gotten the message very differently that says, "Hey, maybe earlier taper means earlier lift off." We'll see what that looks like when the Fed does have that press conference at 2:30 on Wednesday.

ALEXIS CHRISTOFOROUS: All right. And, of course, as usual, we're going to be there with this Fed special, beginning at 1 PM. Brian Cheung, thanks so much. We'll see you then.