Wednesday is the conclusion of the FOMC meeting.  Most are expecting the Committee will recognize persistently high inflation and will announce a speedier tapering of asset purchases that have been supporting economic growth.

But the taper is not all that will be on the agenda.  Fed officials are also likely to signal faster and larger tightening of monetary policy over the next three years—to an extent that markets might have not yet anticipated.

September was the last time the Fed published its official projections.  At that time the Committee expected inflation to fall back close to the Fed’s 2% target even as employment pushed past the level consistent with price stability.

The central bank’s target rate for overnight funds at the end of 2024 was 1.8%, well below the 2.5% level most judged as neutral.  A 0.3%-year end 2022 rate was then projected and 1.0% for 2023.

How much will this change?  Today, the private sector 2022 median forecast is a 0.8% rate and a 1.8% rate by 2023-year end.

As noted above, many believe the markets have not yet anticipated such an aggressive Fed.  If history is of any guise, volatility will rise.

Commenting about yesterday’s market activity, equities were moderately lower as most are nervous about a wave of potential changes of central bank policies.  This week over 20 central banks are meeting.

Longer dated Treasuries however advanced on these fears of more hawkish central bank policies.  Most including me cannot justify a 1.85% 30-year with the greatest inflation in 39 years.  The rational for lower long-term rates is that the Fed will act proactively to stem this rise hence nipping the pricing pressures in the proverbial bud.

Former Federal Reserve Board Member Kevin Warsh stated in yesterday’s WSJ “The Fed has acted an enabler, acting belatedly and with insufficient conviction to stem inflation,” a direct contradiction for the rational of the current advance in long dated Treasury prices.

Released today is the NFIB Small Business Optimism Survey and the PPI.  How will the data be interpreted?

Last night the foreign markets were down.  London was up 0.31%, Paris down 0.06% and Frankfurt down 0.10%.  China was down 0.53%,  Japan down 0.73%  and Hang Seng down 1.33%.

The Dow should open flat nut NASDAQ futures are off about 0.75% ahead of key inflation data.  The 10-year is off 6/32 to yield 1.44%.


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