US stocks rallied to fresh record highs as the Fed tapering announcement went as planned, while Fed Chair Powell stuck to the argument that inflation is ‘transitory’. The definition of transitory now means pricing pressures should ease during the second or third quarter. Stocks will continue to add to records after this dovish taper and a robust ISM services report showed activity is picking up.
The Fed might be misreading inflation, but all that means more accommodation for the economy, which is good news for stocks. The Fed could finish tapering by June and that is currently when markets are expecting them to increase rates. Before the FOMC decision, markets were pricing in two rate hikes in 2022 and that remained the case post-press conference.
The dollar weakened as many traders thought the Fed was going to pivot on inflation and that would move up rate hike expectations.
The FOMC statement formally announced tapering is starting this month, showing the Fed is following through on promises made to financial markets. The Fed will begin tapering $15 billion this month and another $15 billion in December. If the Fed sticks to the $15 billion a month pace, that could have them raising rates at the July 27th meeting. The Fed statement is weakening in its stance that inflation will be transitory. The September 22nd statement said, “inflation is elevated, largely reflecting transitory factors” which is much more confident than today’s statement that said the factors are expected to be transitory.
The market reaction was somewhat subdued as this taper announcement was mostly priced in but the reaction was positive for stocks, short-end yields dipped but then pushed higher, while the dollar weakened slightly.
During the Q/A, Powell did not put up much of a fight in saying it is possible to reach maximum employment in the second half of next year. Powell also acknowledged the strong rise in wages but made sure to say he doesn’t see troubling increases.
Powell’s emphasized that the inflation they are seeing is from bottlenecks and demand, not a tight labor market.
It is fascinating that Fed Chair Powell has not yet been renominated by President Biden. The longer it takes Democrats to pass Biden’s infrastructure spending and economic package, the more nervous financial markets should become with Fed Chair Powell getting renominated. Yesterday’s election results sent a message to the Biden administration and he is running out of things to offer progressives. A Powell renomination would easily pass Congress, but that might not be what Biden does to appease Senator Warren and other progressives. If Powell is not renominated, you can probably erase one of those rate expectations for next year.
Republicans are feeling good after strong outings in Virginia and New Jersey. Midterm elections are a year away, but expectations are growing that Republicans will take back the Senate and possibly the House. Last night’s election results clearly showed many Americans are rejecting President Biden’s policies. President Biden’s margin of victory in the Garden State was just under 16 percentage points (57.3% v 41.4%) and it seems Democratic Governor Murphy might be re-elected by the slimmest of margins. Biden’s victory against Trump in Virginia was 10 points and that flipped to the Republicans last night. The Virginia governor election went 50.7% to Republican Youngkin and 48.5% to Democrat McAuliffe.
Americans are frustrated with the Biden administration over higher gasoline prices, massive spending, rising taxes, and the overall government overreach during the pandemic.
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