The FOMC concluded its December meeting and announced that it would be increasing the taper of its bond purchases. Additionally, updated dot plots from committee members showed a consensus expectation of 3 rate hikes next year.
Neither development was entirely surprising as short-term rates have been creeping higher. While this was only a moderate headwind for the major averages, it did cause severe pullbacks in more growth and speculative type stocks.
In its usual ironic fashion, the stock market had a massive rally upon the announcement of the policy change. This led to many of its recent losses being reversed in a dramatic fashion - the ultimate buy the news, sell the rumor move. In fact, the S&P 500 (NYSE: SPY) closed at 470.60 which is only 19 cents away from it's all-time closing high. The market's bullish reaction is an indication that the worst could be over when it comes to the market's risk-off mood as it accepts the new monetary regime.
Asset purchases will be reduced to $60 billion per month from the $120 billion per month that was being purchased in October. Based on the dot plots, asset purchases should be completely tapered by the Spring which should then lead to rate hikes. One reason for the market's bullish reaction is the slow pace of hikes after the first 3 in 2022 with 2 hikes forecast for 2023 and 3 for 2024.
The dot plot also showed an increase in the inflation forecast to 5.3% from 4.2% previously. The current outlook is for a slight moderation in inflation to 2.7% for 2022. The forecast for the unemployment rate also declined to 4.3% from 4.8%. They also decreased their outlook for GDP growth in 2021 from 5.9% to 5.5%. 2022 growth was slightly increased to 4% from 3.8%.
There was some expectation that the Fed could possibly push back the tapering given the recent rise in coronavirus cases and the emergence of the omicron strain. The Fed did acknowledge this risk but it didn't seem material to policy.