Federal Reserve Meeting Next Week Likely to Result In Accelerate Taper Schedule

FS Insight Team

Inflation numbers came in very hot this morning. CPI rose at an annual rate of 6.8%, which was the highest level since 1982. Food, Energy and Shelter costs were all big drivers in this report which is concerning for obvious reasons. However, Energy prices, which rose 33%, have tempered a bit recently and Used Cars were still up about five times as much as food. Most seem to think this raises the likelihood of a more aggressive taper timeline being announced on December 15th, the next FOMC meeting date.

Even since before Powell said it was time to retire transitory the yield curve has been flattening. The 2-year treasuries have gone from .46% up to .7% since October and 10 yields have moved in the opposite direction. The curve tends to flatten in anticipation of a Fed tightening cycle, and the bond market appears on the lookout for a potential abrupt response to inflation.

A majority of respondents in a poll by The Financial Times now expect tapering to be over by March. Similarly, projections for rate rises in 2022 have been rising. Ultimately, we always like to remind our readers that tapering does not constitute tightening but rather the slowing of an ultra-accommodative policy. Several of the heads of our research verticals also have commented that the Fed has ample reason to remain more dovish than some inflation hawks are predicting

It is essentially a high-noon for the Fed on inflation, and next week’s meeting is highly anticipated. However, given the turmoil recently and the fact that markets are well aware of this potential outcome and still closed at an all-time high today is encouraging.

Powell has handled the messaging on tapering pretty well in our judgment, and one must remember that tapering is the easy part, lift-off, or when the Fed will first raise the Federal Funds Rate is a much trickier position that is much more fraught with risks that market could over-react or that a policy error could occur.

Economists in the same survey we cited above mostly now think that the first rate-rise of at least 25 basis points will occur before Q3 of next year. 60% of Economists polled answered that they believed lift-off would now occur in Q1 or Q2 of 2022, which has been steadily creeping forward.

The Fed has done several about-faces on policy, and there is certainly a rising prospect that their credibility could be undermined in the face of persistently high inflation numbers that now seem to be entering vital portions of the consumer wallet. However, this is not our base case and we see several moderating factors on inflation. Ultimately, monetary policy is too broad a tool to fix supply-chain crunches. However, there is a great deal of variability possible as inflation expectations themselves sometimes can become self-fulfilling prophecies. It’s a brave post-Phillips Curve world, but we think the economic strength is still present in the US economy and remain firmly bullish into YE.

The tapering of monthly purchases of $80 bn of Treasuries and $40 bn of MBS began in November, with a reduction of $10 bn and $5 bn, respectively. The Fed will discuss an accelerated timeline at its December meeting which will occur on December 14th and 15th. The benchmark yield on the 10-year settled down a bit from last week at 1.482%.

Disclosures (show)

Get invaluable analysis of the market and stocks. Cancel at any time. Start Free Trial

Articles Read 2/2

🎁 Unlock 1 extra article by joining our Community!

You are reading the last free article for this month.

By continuing, you agree to the Terms of Service and Privacy Policy.

Already have an account? Sign In

Events

Trending

Trending tickers in our research

Get invaluable analysis of the market and stocks. Cancel at any time. Start Free Trial

Articles Read 2/2

🎁 Unlock 1 extra article by joining our Community!

You are reading the last free article for this month.

By continuing, you agree to the Terms of Service and Privacy Policy.

Already have an account? Sign In