The U.S. Federal Reserve concluded its December meeting Wednesday (Dec. 15), announcing it will end its crisis-driven asset purchases in March, paving the way for three interest rate hikes by the end of 2022, as policymakers voiced concerns over persistently high inflation.
The central bank, which first announced last month that it was increasing the reduction of its bond purchases, or so-called tapering, said Wednesday that it will do so at a faster pace.
Starting in January, net asset purchases will decrease by $30 billion per month , including $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities.
The Fed has been under pressure to respond to surge in prices. Officials now forecast that inflation would run at 2.6% next year, compared to the 2.2% projected as of September. On the labour market, the Fed sees the jobless rate return to the 3.5% mark next year (prev. saw 3.8%), where it is likely to stay over its forecast horizon.
As a result, officials at the median projected the Fed’s benchmark overnight interest rate would need to rise from its current near-zero level to 0.90% by the end of next year, up from the 0.3% expectation from September. That would kick off a hiking cycle.
Tom Garretson, senior fixed income strategist at RBC Wealth Management, told CNBC that the notion of three rate hikes in 2022 is a bit more hawkish than expected, “but it seems the market is OK with it. ”
Major stock markets in the United States crossed to the green territory near the end of Wednesday’s trading session as it seems that investors don’t fear the taper…or eventual rate hikes for that matter.
The S&P 500 added 1.2%, while the tech-rich Nasdaq Composite advanved 1.5%. The Dow Jones Industrial Average added 280 points. All three were in negative territory for the day before the Fed’s decision.
As the dust settles, the bottom line is that the Fed’s announcement was largely in line with what the market was expecting (accelerating taper, raising inflation forecasts, seeing continual progress in the labour market)
The central bank’s mandate, in broad terms, is to ensure as many people as possible have jobs, while keeping growth and prices from getting out of control. In Sven Henrich’s words: “The Feds main mission today: Indicate a schedule for accelerating taper without upsetting markets cause not upsetting markets is its true mandate.”
WHAT? YOU THOUGHT I'D LET MARKETS DROP INTO CHRISTMAS? pic.twitter.com/wSfUdyIISI
— Sven Henrich (@NorthmanTrader) December 15, 2021
“The unspoken truth of America is we need inflation in this society to keep the political peace,” Christopher Whalen, chairman of Whalen Global Advisors told CNBC. “I’m not looking for a great deal of inflation fighting from this guy [Powell], because if the market swoons he’s going to fold real fast.”