CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Please ensure you fully understand the risks involved. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Please ensure you fully understand the risks involved.

FOMC meeting review: 4 takeaways as the Fed reduces policy support

The US Federal Reserve has announced a reduction in policy support at its final meeting of 2021. However, the markets have reacted positively to the move.

The final FOMC meeting for the year has now been done and won, and for the most, markets have reacted to it with a level of positivity. The signals in market pricing have been somewhat mixed. However, what was conveyed?

Here are the key takeaways from the meeting.

Tapering will increase to $US30 billion per month

It was a practical certainty heading into the meeting, the Fed announced a hastening of its QE tapering, increasing the reduction in bond buying on a monthly basis to $30 billion, from $15 billion previously. The make-up of the taper will be $20 billion Treasuries and $10 billion Mortgage Backed Securities which comes as the Fed looks to move quicker to lean against inflationary pressures in the US economy. Although it’s expected to plough forward with the taper, Chair Powell in his speech emphasized the flexibility of their approach, which has been taken to mean that the process can be stopped if anything unforeseen disrupts the economy in the future.

Projections imply three rate hikes in 2022, another three in 2023

The core concern for markets in recent weeks has been the likely path of the Federal Funds Rate, and whether it could be used as the tool to tamp down on inflation. As expected, the Fed’s famous “dot-plots” implied a much quicker and steeper path for interest rates, with the FOMC implying three rate hikes in 2022, and a further three in 2023, up from around one and three respectively in the September projections. As always, Chair Powell made clear that the projections weren’t guidance, but forecasts made based on current – and imperfect – estimates of future economic fundamentals. However, the new dot-plots underlined the Fed’s pivot to a hawkish policy stance.

Chair Powell changes tone, but remains upbeat on US economy

Extending upon the pivot made publicly in recent weeks, the Chairperson Jay Powell adopted a more hawkish tone to policy, and a more earnest outlook on what’s proven to be more than just “transitory” inflation for the US economy. Forecasts for inflation have been raised to 5.6% for 2021 and 2.6% for 2022, up from 4.2% and 2.2% in the September projections, revealing the impetus the Fed has seen to reduce policy support in the US economy. The Fed still appears optimistic on the labour market however, even as policy gets tightened, with the unemployment rate tipped to finish this year at 4.3% and fall to 3.5% in the next.

Markets respond bullishly to Powell’s press conference

Despite the clearly more hawkish outlook on future policy, the markets have reacted bullishly to the FOMC decision, with stocks rallying into the close and the US Dollar softening. Investors seem to have liked the colour provided by Chair Powell in his press conference, and it may be to the expressions of flexibility and gentle push backs against a rigid path forward for rate hikes or possibly quantitative tightening in the future. Yields did rise off the back of the meeting, as markets discount tighter policy. However, an initial bear flattening of the US yield curve reversed, as fears about a boom-bust slowdown in the US economy as stimulus is removed eased at the margins.

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This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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