Federal Reserve (Fed) officials stopped short of explicitly stating when it will begin winding down its monthly asset purchases, but they did make one thing clear –it’s coming soon. The Fed appears on track to announce tapering at its early November meeting, with the goal of completing a full wind-down by the middle of 2022. Fed Chair Powell noted the decision to taper should be viewed independently of any rate hikes and liftoff remains well in the future. However, it was notable that 9 of 18 Federal Open Market Committee (FOMC) members now believe a Fed funds rate increase will be appropriate by the end of 2022. All but one member foresee at least one hike by the end of 2023.
Policymakers face a difficult balancing act of addressing meaningful price pressures while supporting the more gradual recovery in the U.S. labor market. Higher and more persistent inflationary pressures are fueling the momentum behind the Fed’s more hawkish bias since the start of the year. We believe the Fed’s gradual reduction to its asset purchases is wholly appropriate given the economic progress made over the past 18 months. Tapering should be viewed as the policy equivalent of a driver easing off the accelerator, not stomping on the brake pedal. The Fed will remain in an accommodative posture for a long time to come.
With the stage set to taper, U.S. yields rose sharply in the second half of last week and continued the trend on Monday. 10-year yields moved above 1.5% for the first time since June. U.S. equities are displaying comfort with the Fed’s plans. The S&P 500 has advanced 2.3% since Wednesday. That is a healthy sign investors believe the U.S. recovery is durable enough to withstand less policy stimulus, underpinned by resilient U.S. demand and further progress on the jobs front.
A look back
- The S&P 500 rallied 0.5% last week, led by the energy and financials sectors. 10-year U.S. Treasury yields rose 9basis points (0.09%) to a 3-month high, primarily fueled by Wednesday’s Fed rate decision.
- The FOMC signaled that it may reduce the pace of its monthly asset purchases as soon as its November meeting. Traders pulled forward consensus rate hike expectations to late-2022.
- Chinese real estate developer Evergrande missed an $84 million debt payment on Thursday, raising questions over next steps from bailout to default.
A look ahead
- A number of Fed officials will follow up last week’s rate decision with public appearances to discuss the Fed’s latest policy deliberations and updates to the members’ consensus economic outlook.
- Partisan debate over the debt ceiling will intensify this week as the U.S. approaches the October deadline where government borrowing is set to eclipse its statutory limit.
- Data releases: 2Q GDP (final), Initial Jobless Claims, ISM Manufacturing, Personal Income & Spending, PCE inflation, Durable Goods Orders.
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