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The Federal Reserve signaled on Wednesday that it plans to start cutting back on asset purchases soon and complete by the middle of next year. Policymakers are now evenly divided on whether the first rate hike of the cycle should take place next year, and not in 2023. The Dow Jones, up sharply ahead of the chief’s press conference Fed Jerome Powell initially ditched some gains as he detailed his plans for cuts. But the shares strengthened before the close.
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No temper tantrum
So far, the Federal Reserve has handled the risk of a 2013-type tantrum with impressive dexterity. Although Fed chief Jerome Powell revealed his support for an early cut in 2021 during his August 27 press conference, the S&P 500 ended this session at an then all-time high.
The Fed buys $ 120 billion in assets per month. This includes $ 80 billion in treasury bills and $ 40 billion in government guaranteed mortgage securities. The Fed statement on Wednesday said “a moderation in the pace of asset purchases may soon be warranted.”
Powell made it clear that the language would be consistent with a cutback announcement at the November 2-3 meeting, as long as the economy continues on the expected track.
The real news is that Powell revealed that committee members discussed when the cut was to take place and generally came to a conclusion. Although not official yet, he said the asset purchases could be completed by the middle of next year.
Federal Reserve Economic Projections
The dot-plot, following the individual perspectives of each member of the Fed’s policy committee, had 9 of 18 plotted in a quarter-point rate hike in 2022. That was up from 7 of 18 in in favor of a 2022 tightening in June projections. However, 3 of the 9 in favor of a rate hike in 2022 actually believe two rate hikes will be warranted next year. This brought the median projection to 0.3% from the current rate, which targets the midpoint of 0% to 0.25%.
One caveat: While Powell and other Fed governors vote at each meeting, regional bank presidents take turns voting. This could mean that doves like Powell and Fed Governor Lael Brainard could still have influence, if this split continues.
More likely, Powell suggested, the differences in policy will be decided by the trajectory of the labor market. Some members who see an appropriate 2022 rate hike are forecasting very low unemployment next year, Powell noted.
A slight majority, 10 out of 18, is now forecasting three rate hikes by the end of 2023. In June, the median projection showed only two hikes.
The Fed’s projections raised the outlook for the central bank’s preferred inflation measure, the personal consumption expenditure price index. Projections now show PCE inflation of 2.2%, up from 2.1% in June.
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Dow Jones, Treasury Yields Reaction to Fed Meeting
After Powell’s press conference started at 2:30 p.m., the Dow Jones was up more than 1% in stock on Wednesday. The Dow Jones slashed its gains when Powell started speaking, but edged up to a 1.2% gain late in the afternoon.
The S&P 500 rose 1.1% and the Nasdaq composite rose 1.1%.
The Dow Jones and S&P 500 both stayed below their 50-day lines, but the rally in the Nasdaq brought the high-tech index back to this key technical panel.
The Dow Jones got off to a rocky start to a Fed-focused week, fearing that the insolvency of Chinese real estate group Evergrande would force a difficult restructuring of the country’s real estate markets. Economists have warned of a potential reduction in Chinese GDP growth that could be large enough to have a global impact, as commodity prices may be hit the hardest.
The Dow Jones slipped 1.8% on Monday then plunged 0.15% on Tuesday.
The overnight news that Evergrande missed a default-free payment deadline sparked Wednesday’s rally. This suggested that Beijing could step in to ensure slow-motion restructuring, rather than allowing a Lehman shipwreck.
As worries about global growth weighed in, the 10-year Treasury yield slipped 6 basis points this week to 1.31% ahead of the Fed’s policy news. Treasury yields did not rebound on the relief of Evergrande, then relaxed a bit more after the Fed meeting ended. But once Powell revealed a seemingly quicker end to the reduction, the 10-year yield jumped to 1.32%.
Be sure to read IBD’s The Big Picture column daily after the close for the latest analysis of the market trend and to make sure growth investors are given the green light.
Please follow Jed Graham on Twitter @IBD_JGraham for coverage of economic policy and financial markets.
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