23 Sep IN MARKET PARLANCE THE FED MEETING WAS A NON-EVENT
Equites remained higher and Treasuries were mostly steady after the Fed signaled it would probably begin tapering as early as November and end by mid-2022. There is also a “growing inclination” to start raising interest rates in 2022. Energy and financials led the advance. Based upon market reaction, the outcome was as largely as expected given little change following the announcement.
Inflation, according to the Fed’s preferred measure, was 4.2% in the 12 months though July, well above the central bank’s 2% target. Many Fed officials have said they expect it to return to around 2% after temporary supply chain disruptions resulting from the pandemic have been resolved though several have also cited the rapid price increases as a reason to begin raising rates as early as next year.
In my view, the statement was more hawkish than expected with many zeroing in “a growing inclination to start raising interest rates in 2022.” As recently as 30 days ago the “inclination” was the later half of 2023. The infamous dot plot, which is a non-binding view of the Committee members indicates a median fed funds rate for 2022 as 0.25% up from 0.125% prior.
As indicated, markets were little moved by the outcome of the meeting, closing around levels that were present right before the announcement was made.
Perhaps the next major topic will be the debt ceiling. I think total financial calamity would occur if the US defaults albeit I am adamantly against increasing the size of the proverbial welfare state. The country can’t pay for existing obligations and at some juncture this massive borrowing will negatively impact the country. It is not as to if but rather as to when.
I naïvely believe the debt ceiling will be raised but the question is how much rancor will first occur.
What will happen today?
Last night the foreign markets were up. London was up 0.12%, Paris up 0.73% and Frankfurt up 0.75%. China was up 0.38%, Japan closed for a holiday and Hang Seng up 1.20%.
The Dow should open nominally higher on fresh concerns about China’s Evergrande Group’s desk as officials asked local governments to prepare for the embattled property developer’s downfall. The 10-year is off 9/32 to yield 1.34%.