The Fed has officially given notice that if the recovery continues as planned, a moderation in the pace of asset purchases can happen soon. Wall Street can now completely price in a formal November taper announcement with a December start date. The dot plots show the Fed officials are trying not to show a hawkish hand as they are split over a 2022 hike, only two more officials move forward their dot. The medium dot plots show the Fed is hesitant in showing they are willing to bring rates to a normal level. The Fed still sees risks of higher inflation and that story may help accelerate interest rate hike expectations next year.
Risky assets loved the FOMC statement and updated projections as the Fed has well telegraphed that they were nearing a taper announcement and continue to show they are in no rush to deliver interest rate hikes. The biggest risk to the stock market is accelerated pace of tightening and the Fed is showing that is something they will avoid unless they were dead wrong about inflation.
US stocks rallied as investors believe the Fed will be in no hurry to raise interest rates as they still think inflation will be transitory in 2022. The Fed’s goal is to taper without triggering a significant steepening of the yield curve and that was the initial reaction to the statement.
The S&P 500 index, Nasdaq and Dow Jones Industrial all rallied over 1%. The dollar was all over the place during the Fed event and settled higher. The fascinating price action came with Treasuries that showed the curve flattened.
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