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By Nicholas
Jasinski | Tuesday, December 14 Tightening. Stock
indexes finished in the red today, although off their worst levels of the
session. The Dow Jones Industrial
Average slipped 0.3%, the S&P
500 lost
0.7%, and the Nasdaq Composite fell 1.1%. Growth stocks in particular took it on the
chin today: The Vanguard
S&P 500 Growth exchange-traded fund
(VOOG) lost 1.2%, while the value equivalent (VOOV) slipped just 0.2%. That
dynamic had more to do with what investors expect to be tomorrow's main story
than anything that happened today. All eyes tomorrow afternoon will be on the
conclusion of the latest meeting of the Federal
Reserve's policy setting
committee, which will be followed by a press conference with Chairman Jerome
Powell. The consensus among economists and Fed
watchers is that the Federal Open
Market Committee will double the pace of its monthly asset
purchase tapering. That would mean a reduction of $20 billion a month
of Treasuries purchases and $10 billion a month of mortgage-backed securities purchases,
putting the program on track to end by March 2022. FOMC members will also update their
forecasts for future economic data and interest rates. The so-called
"dot plot" could show a faster pace of interest rate
increases next year to follow the more rapid tapering. Bond-market
pricing currently implies roughly three quarter-point increases in 2022. Here's a preview of what to expect from BofA
Securities economists: The updated dot plot will
likely reveal a pull forward in the dots, with a median trajectory of
two hikes in 2022, and three hikes each in both 2023 and 2024.
Chair Powell is likely to highlight rising inflation risks but may be
noncommittal about the timing of rate hikes and point to Omicron uncertainty. We believe the December
FOMC meeting communications will be seen as hawkish on balance, even if 2022
hikes are projected below the market. The taper acceleration will clear the
way for a potential rate hike in March. Powell and the committee's views on
inflation will dominate the question-and-answer period of the
post-meeting press conference. This
morning's November producer
price index showed a 9.8%
year-over-year rise, following last Friday's 6.8% annual increase in consumer
prices. Those continued hot inflation readings should be more than enough
cover for the Fed to take its foot off the stimulus pedal faster than
officials had planned to just six weeks ago. There will still be plenty of policy
uncertainty heading into 2022. Rate increases are almost certainly off the
table until tapering is over, but what happens next is anyone's guess. An
increase in March isn't priced into futures markets, while the implied
odds of a May liftoff are about even. Much will depend on the monthly inflation
and unemployment data readings between now and then. And those are
far from clear as well. Read Randall
Forsyth's latest
column for more on the outlook for Fed policy and the many quandaries
facing policy makers. |
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