The Federal Reserve just concluded its latest meeting. Over the last few months, the Committee has been increasingly signalling that the economy has gained sufficient momentum to justify the tapering of asset purchases.
The Fed finally made it official by signalling that the taper was going to start later in November, despite some concerns that recent developments like the Delta variant and Congress' inability to reach a deal could cause the Fed to delay the taper.
On a monthly basis, the taper will be slow and gradual. It will start with a reduction of $15 billion per month - $10 billion in Treasuries and $5 billion in mortgage-backed securities. This process could take longer than a year given that the Fed is currently buying $150 billion of securities every month. In essence, this is like the 'training wheels' being taken off the economy, given there is enough self-sustaining growth.
Additionally, the Fed seems to be now taking the inflation threat as seriously as it does the shortfall in unemployment. Chair Jerome Powell said that the increase in inflationary pressures should persist until next year. The committee did say that inflationary pressures were stronger than anticipated but remain "temporary" and "transitory". Powell also stressed that the Fed is not on a predetermined path and will make appropriate adjustments as necessary based on economic data and any developments that happen.
Of course, there is considerable scepticism about the Fed's decision. Some believe that the inflation threat is the biggest problem facing the economy which means the Fed should aggressively increase rates. Others believe the Fed is repeating mistakes of the last decade when it tightened unnecessarily which led the economy to run below full capacity, while inflation fell below the Fed's target rate.
Stocks reacted quite strongly to the FOMC announcement as the S&P 500 (NYSE: SPY) broke out to new highs, following the announcement, as Treasuries weakened. Some of the leading sectors were financials and cyclical stocks.