The US Federal Reserve has announced a reduction in policy support at its final meeting of 2021. However, the markets have reacted positively to the move.
The final FOMC meeting for the year has now been done and won, and for the most, markets have reacted to it with a level of positivity. The signals in market pricing have been somewhat mixed. However, what was conveyed?
Here are the key takeaways from the meeting.
Tapering will increase to $US30 billion per month
It was a practical certainty heading into the meeting, the Fed announced a hastening of its QE tapering, increasing the reduction in bond buying on a monthly basis to $30 billion, from $15 billion previously. The make-up of the taper will be $20 billion Treasuries and $10 billion Mortgage Backed Securities which comes as the Fed looks to move quicker to lean against inflationary pressures in the US economy. Although it’s expected to plough forward with the taper, Chair Powell in his speech emphasized the flexibility of their approach, which has been taken to mean that the process can be stopped if anything unforeseen disrupts the economy in the future.
Projections imply three rate hikes in 2022, another three in 2023
The core concern for markets in recent weeks has been the likely path of the Federal Funds Rate, and whether it could be used as the tool to tamp down on inflation. As expected, the Fed’s famous “dot-plots” implied a much quicker and steeper path for interest rates, with the FOMC implying three rate hikes in 2022, and a further three in 2023, up from around one and three respectively in the September projections. As always, Chair Powell made clear that the projections weren’t guidance, but forecasts made based on current – and imperfect – estimates of future economic fundamentals. However, the new dot-plots underlined the Fed’s pivot to a hawkish policy stance.
Chair Powell changes tone, but remains upbeat on US economy
Extending upon the pivot made publicly in recent weeks, the Chairperson Jay Powell adopted a more hawkish tone to policy, and a more earnest outlook on what’s proven to be more than just “transitory” inflation for the US economy. Forecasts for inflation have been raised to 5.6% for 2021 and 2.6% for 2022, up from 4.2% and 2.2% in the September projections, revealing the impetus the Fed has seen to reduce policy support in the US economy. The Fed still appears optimistic on the labour market however, even as policy gets tightened, with the unemployment rate tipped to finish this year at 4.3% and fall to 3.5% in the next.
Markets respond bullishly to Powell’s press conference
Despite the clearly more hawkish outlook on future policy, the markets have reacted bullishly to the FOMC decision, with stocks rallying into the close and the US Dollar softening. Investors seem to have liked the colour provided by Chair Powell in his press conference, and it may be to the expressions of flexibility and gentle push backs against a rigid path forward for rate hikes or possibly quantitative tightening in the future. Yields did rise off the back of the meeting, as markets discount tighter policy. However, an initial bear flattening of the US yield curve reversed, as fears about a boom-bust slowdown in the US economy as stimulus is removed eased at the margins.
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