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Investors across the globe highly anticipated the two-day FOMC (Federal Open Market Committee) meeting, which ended on Wednesday. The consensus seems to be that the Fed expects to begin tapering bond buying in November or December.
Tapering has been a hot topic over the past couple of months as the central bank has been toying with the idea of cutting down bond buying. Fed officials, including chairman Jerome Powell, have hinted that the US central bank’s $120 billion monthly bond buying could be scaled back. However, they insisted that they would not decrease bond buying until they were confident that the economy had made substantial progress.
Following the meeting, Fed Chairman Jerome Powell explained that “while no decisions were made, participants generally viewed that so long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate.”
The stock market held tight following the Fed’s announcement, with the S&P 500 closing up nearly 1%.
Reportedly, TD Securities expect the Fed to decrease bond buying by $15 million a month starting November. In a two-birds-one-stone move, the Fed would help boost the Treasury yields and strengthen the dollar.
The final decision regarding the future of Treasury yields will also determine the outlook for other global interest rates, credit markets, equities, and currencies. There is no doubt that tapering would alter the supply and demand dynamics.
The dollar’s direction is crucial for investors as it impacts other sectors such as commodities and corporate earnings. The higher the yield, the more attractive dollar-dominated assets become to investors. Reportedly, as of late Wednesday, the dollar was up 0.23% against a basket of other major currencies.
The gap between five-year notes and 30-year bonds fell below 100 points after the FOMC announcement, indicating economic progress. This is a good signal, as a narrow gap between the two is typically an indicator of financial instability and rising inflation.
Investors also flocked to hear about a potential wild card for the markets – the Fed’s interest rate forecast. This is important because it helps investors gauge how the markets will respond to the news. After all, the bond buying program is the main driver behind the S&P doubling from its March 2020 lows.
For now, the committee unanimously agreed to keep short-term rates anchored near zero. However, the decision also came with an indication that rate hikes could be coming sooner than expected. Reportedly, regional heads from the FOMC suggested starting tapering immediately to put the Fed in a better position to raise interest rates in the second half of next year.
Reportedly, in its updated quarterly projections, Fed officials now expect to raise their key short-term rate once in 2022, three times in 2023, and three times in 2024. That benchmark rate, which influences many consumer and business loans, has been pinned near zero since March 2020, when the pandemic erupted.
Following the announcement, markets ended the day much higher as the Fed appeared in no rush to hike rates.
“While a taper announcement, maybe, is coming in November, that they didn’t do so today just reflects a still uber dovish committee,” commented Peter Boockvar, chief investment officer at Bleakley Advisory Group.
The next meeting, when we can expect signals from the Fed, is set for November 2nd and 3rd.
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