FOMC meeting concludes revealing an increased hawkish demeanor

The Federal Reserve concluded the last FOMC meeting of the year capped off by a statement that contained a new “dot plot” which lays out their updated monetary policy through 2024. The last dot plot anticipated that there would only be one interest rate hike in 2022. However, that changed dramatically. Currently, the Federal Reserve is anticipating raising rates three times in 2022, three times in 2023, and two times in 2024. Each interest rate hike will be ¼% or 25 basis points. This is a much more aggressive timeline for rate hikes than previously expected.

However, Chairman Powell made the distinction between the ending point of tapering and the onset of lift-off. He said that as far as the initiation of rate hikes, that will be data-dependent as we look at levels of employment and initiate interest rate normalization till they have determined that the country is at maximum employment. The anticipation is that the first-rate hike will begin approximately in June 2022, which was construed as a bullish statement both for U.S. equities and gold. Both U.S. equities and gold prices came off of their lows as Chairman Powell spoke about when they would begin to raise interest rates next year even though they have penciled in a total of three rate hikes in 2022.

According to CNBC, “Stocks hit their highs of the day Wednesday as Fed Chairman Jerome Powell answered questions following the central bank’s latest monetary policy announcement. The Dow Jones Industrial Average traded about 305 points higher, or 0.9%. The S&P 500 gained 1.3%, and the Nasdaq Composite advanced 1.6%.”

Chairman Powell’s press conference had the same effect on Gold which was trading at a low of $1758 and within one hour (during and after the conclusion of Powell’s press conference), gold jumped to $1779 per ounce. As of 5:45 PM EST gold futures basis, the most active February 2022 contract is up $5.20 and fixed at $1777.50.

They also, as expected, accelerated the timeline for tapering by doubling the monthly reduction to $30 billion instead of the former $15 billion. That means that they will increase their purchases of mortgage-backed securities by $5 billion and increase their purchases of United States debt assets by $10 billion. This means that they will conclude their tapering process early in 2022. However, they made no mention of any reduction in their current asset sheet which has a balance exceeding $8.6 trillion. Chairman Powell stated during the press conference that their asset sheet would contain enough capital to provide needed liquidity even after tapering concludes.

Chairman Powell addressed the tapering process by saying, “In dealing with balance sheet issues, we’ve learned that it’s best to take a careful, sort of methodical approach to making adjustments. Markets are going to be sensitive to it, and we thought this was doubling the speed. “We are basically two meetings away now from finishing the taper. We thought that was the appropriate way to go.” Powell stated in his Q and A.

In regards to the acceleration of their tapering process Chairman Powell said, “Moving forward the end of our taper by a few months is really an appropriate thing to do,” When asked about the new Covid-19 variant, he stated, “Omicron doesn’t really have much to do with that.” He added that “There’s a lot of uncertainty which is why we called it out in our statement or post-meeting statement as a risk.” adding Omicron’s effect on the economy “will depend on how much it suppresses demand. As opposed to suppressing supply.”

The take away is that the Federal Reserve has been slow to acknowledge that they underestimated how hot inflation would get, and how long it would last. The fact that the Federal Reserve is now anticipating eight interest rate hikes from 2022 to 2024 confirms that the Federal Reserve has been in essence chasing inflation, reacting to it as it continues to spiral out of control. They did not have a contingency plan for this scenario which is why the Federal Reserve has pivoted to a total of eight rate hikes between 2022 and the end of 2024.

Wishing you as always good trading and good health,