Taper Tiger

By Alex Eule |  Wednesday, December 15 Strange Relief. As of today, there's no more doubt. Federal Reserve Chairman Jerome Powell has turned hawkish. And the Fed's 'dot plot' indicates that most members of the Federal Open Market Committee now expect three rate hikes next year. Back in September, half of the FOMC participants weren't expecting a single 2022 increase. But accelerating inflation has quickly changed the Fed's view. And Powell sounded a very different tone during his press conference today. When it comes to inflation, "transitory" has been replaced by "persistent," even "entrenched." (More on that below.) The Fed's more hawkish views goes beyond just hikes. The FOMC indicated that it would now wind down its bond buying program by March rather than June as previously planned. That move was not a big surprise, my colleague Megan Cassella notes today:   The move to double the pace at which the Fed would wind down its bond-buying program was widely expected among economists and on Wall Street. It marks a fairly quick turnaround for the central bank, which had announced plans to start cutting down its $120 billion in monthly bond purchases by $15 billion in November. But the Fed said at the time that it would adjust that pace if needed depending on the economic outlook, and Powell and other top Fed officials had signaled in the weeks since that it was considering doing so.  All told, the Fed has essentially guaranteed a more a far more restrictive monetary policy in the months and years to come. Rising interest rates and stocks don't generally mix. Higher rates and a tighter money supply tend to limit risk-taking, suppressing investors' appetite for equities. That's Investing 101 and something we've been talking about for months now. But today the investing basics didn't apply. Major indexes actually turned positive on the Fed's policy statement at 2 p.m. and rallied from there, closing at session highs.  The S&P 500 gained 1.6% to its second highest close in history, just 0.05% off its Dec. 10 record.  The Dow Jones Industrial Average ended the day up 383 points, or 1.1%. The Nasdaq Composite was up 2.2%.  Powell "did a very good job threading the needle," according to investment strategist Louis Navellier. "Investors were, and should be, delighted that rates will stay at near-zero levels until March. Moreover, the predictable rate rises are now fully baked into forecasts giving the markets the stability that will be needed to help markets move toward their next leg upward." So much for risk off.

 

DJIA: +1.08% to 35,927.43 S&P 500: +1.63% to 4,709.85 Nasdaq: +2.15% to 15,565.58 The Hot Stock: Eli Lilly & Co. +10.4% The Biggest Loser: Nucor -8.6% Best Sector: Technology +2.7% Worst Sector: Energy -0.5%