Fed Surprises: Bond Taper May Be Quick, 2022 Hike Possible

The Federal Reserve signaled Wednesday that it expects to start tapering asset purchases soon and finish by the middle of next year. Policymakers are now evenly split over whether the cycle’s first rate hike should come next year, not in 2023. The Dow Jones, up strongly before Fed chief Jerome Powell’s press conference, initially gave up some gains as he detailed taper plans. But stocks shored up heading into the close.


No Taper Tantrum

So far the Federal Reserve has handled risk of a 2013-style taper tantrum with impressive dexterity. Despite Fed chief Jerome Powell revealing his support for a 2021 start to tapering at his Aug. 27 press conference, the S&P 500 finished that session at a then-record high.

The Fed is buying $120 billion in assets per month. That includes $80 billion worth of Treasuries and $40 billion in government-backed mortgage securities. The Fed statement Wednesday said that “a moderation in the pace of asset purchases may soon be warranted.”

Powell made clear that the language would be consistent with a taper announcement at the Nov. 2-3 meeting, as long as the economy continues on the expected path.

The real news is that Powell revealed committee members had discussed the timing of tapering, and had generally reached a conclusion. Though not yet official, he said the asset purchases could be completed by the middle of next year.

Federal Reserve Economic Projections

The dot-plot, tracking each Fed policy committee member’s individual outlook, had 9 of 18 penciling in one quarter-point rate hike in 2022. That was up from 7 of 18 favoring a 2022 tightening in June projections. However, 3 of the 9 favoring a 2022 rate hike actually think two rate hikes will be warranted next year. That lifted the median projection to 0.3% from the current rate, which targets the midpoint of 0%-0.25%.

One caveat: While Powell and other Fed governors vote at every meeting, regional bank presidents get to vote on a rotating basis. That could mean that the doves like Powell and Fed Governor Lael Brainard could still hold sway, if this split held.

More likely, Powell suggested, differences over policy will be decided by the trajectory of the job market. Some members who see a 2022 rate hike as appropriate are projecting very low unemployment next year, Powell noted.

A slight majority, 10 of 18, now see three rate hikes by the end of 2023. In June, the median projection indicated only two hikes.

The Fed projections bumped up the outlook for the central bank’s favored measure of inflation, the personal consumption expenditure price index. Now projections show PCE inflation of 2.2%, up from 2.1% in June.

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Dow Jones, Treasury Yield Reaction To Fed Meeting

After the start of Powell’s 2:30 p.m. press conference, the Dow was up more than 1% in Wednesday’s stock market action. The Dow pared gains as Powell began speaking, then firmed up, ultimately closing 1% higher.

The S&P 500 rose almost 1% and the Nasdaq composite climbed 1%.

Both the Dow Jones and S&P 500 remained below their 50-day lines, but the Nasdaq rally carried the tech-heavy index back up to that key technical signpost.

The Dow Jones had a rocky start to a Fed-focused week amid fear that insolvency at China’s Evergrande real estate group could force a tough restructuring of the country’s property markets. Economists warned of a potential cut to Chinese GDP growth that could be big enough to have a global impact, with commodities prices could take the worst hit.

The Dow slid 1.8% on Monday then dipped 0.15% on Tuesday.

Overnight news that Evergrande got past one payment deadline without defaulting sparked Wednesday’s rally. That suggested that Beijing might step in to ensure a slow-motion restructuring, rather than allow a Lehman-like trainwreck.

As global growth concerns weighed, the 10-year Treasury yield slipped 6 basis points this week to 1.31% ahead of the Fed policy news. Treasury yields failed to bounce on relief over Evergrande, then eased a bit more after the Fed meeting ended. But once Powell revealed a seemingly quicker end to tapering, the 10-year yield rose to 1.32%.

Be sure to read IBD’s after-the-close The Big Picture column each day to get the latest analysis of the market trend and make sure growth investors have a green light.

Please follow Jed Graham on Twitter @IBD_JGraham for coverage of economic policy and financial markets.


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