Heralding one of the most hawkish policy pivots in years, the Federal Reserve said it will double the pace at which it is scaling back purchases of Treasuries and mortgage-back securities to $30 billion a month, putting it on track to conclude the program in early 2022 rather than mid-year as initially planned.

The change in tapering schedule was widely anticipated.  A surprise is the projection of three rate hikes in 2022 with a target of the overnight rate of  0.9% and an additional three in 2023 targeting the overnight rate at 1.6% and two more in 2024 bringing the fed fund rate to 2.1% by the end of that year.

This marks a major shift from the last time forecasts were updated in September, when the Committee was evenly split on the need for any rate increases at all in 2022.

The abrupt change in the taper pace and interest rate projections reflects “inflation developments and the further improvement in the labor market” as per the Fed.  The Committee further stated “supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation.”

Stocks whipsawed on the statements.  Many, myself included, thought that if the Fed shocked the markets as they had, the immediate reaction would be a swift decline in equities. The NASDAQ advanced about 2% and Dow around 1.0%.  Treasuries were also volatile.   The yield curve initially flattened only to steepen later in the day.

What will happen today?

Last night the foreign markets were up.  London was up 1.03%, Paris up 1.61% and Frankfurt up 1.75%.  China was up 0.75%, Japan up 2.13% and Hang Seng up 0.24%.

The Dow should open nominally higher on the belief that Fed policy will help fight elevated inflation without derailing economic growth.  The Bank of England also unexpectedly raised rates.   The 10-year is off 1/32 to yield 1.46%.


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