When does a hawk look like a dove? For today, the answer is: when the hawk’s arrival has been well telegraphed and it’s talons aren’t as sharp as feared. Today’s Fed meeting and announcement marks a full pivot away from ultra accommodative policy to a tightening anti-inflation stance.
- The Pace of the Fed’s Tapering of Bond Purchases Is Doubling.
- Bond Buying is Now Scheduled to End in March 2022 (Not June). This means that interest rate hikes may begin in April. Speaking of hikes, the Fed’s “dot plot” now calls for 3 rate hikes in 2022 and another 3 in 2023 (bringing the cost of funds to about 1.6% from 0% as of today).
Powell spoke of the “dual mandate” regarding inflation and employment thresholds which need to be met in order to begin raising rates. The inflation part of the equation has been met. He indicated that “Rapid progress to maximum employment” is underway, giving more certainty to a rate increase in April 2022. More on inflation – the recent record CPI and PPI increases are further proof that “transitory” is no longer appropriate. Powell today said, “The risk of higher inflation becoming entrenched has increased”.
Stocks rallied on a “relief trade” as market volatility has been high since Powell’s November 30 Congressional testimony indicating that a pivot was imminent. Today’s statement and Powell’s remarks calmed markets, providing a level of certainty. Today is a case of, “sell the rumor, buy the news”. A Fed funds rate of 0.9% at year end 2022 is not being seen as a major impediment to economic growth and it gives “cover” to investors worried about asset bubbles. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners