NEW YORK (Reuters) – The Federal Reserve said on Wednesday it would start cutting its monthly bond purchases in November with plans to end it in 2022, but remained confident that high inflation would prove “transient “and would probably not require a rapid rise in interest rates.
However, the U.S. central bank said global supply difficulties were heightening inflation risks, saying these factors “should be transitory” but should ease to allow for the expected decline in inflation. A small change in language indicated that Fed officials see the process taking longer.
The S&P 500 hit session highs after Fed Chairman Jerome Powell stressed it was not time to raise interest rates as the labor market failed to recover, during interrogations of journalists after the FOMC statement.
EQUITIES: S&P 500 rose and last rose 0.46%
BONDS: The 10-year US Treasury yield was unchanged from pre-report at 1.5717% after briefly rising above 1.60% and the 2-year yield fell back to 0.4696%
FOREX: The dollar index slips a little further to -0.28%
DAVID PETROSINELLI, SENIOR DEALER, INSPEREX, NEW YORK
“What the market is trying to digest is if the language around the cut is enough? Is this what the market was looking for? The Fed is doing everything it can to not surprise the market with these announcements This is what the market was waiting for.”
MARVIN LOH, GLOBAL MACRO STRATEGIST, STATE STREET, BOSTON, MASSACHUSETTS “Exactly as expected. I think the market’s assessment of a rate hike in July 2022 is a bit aggressive, but that depends on signs of transitory inflation by the middle of next year. Much depends on how long these shortages that we face last. But the price is pretty consistent with what we’ve seen come in.
“What we’ve seen over the past two to three weeks is investors pushing back on the ability or appropriateness of central banks to wait for the ‘transitional’ period to emerge. Inflation is still much higher than expected and is fueled by factors central banks can’t really control. From the Fed’s perspective, they certainly don’t expect to raise rates at this point, although they have the necessary elements in place to do so if and when they need to.
“Short rates have gone up, long rates have been fairly flat, because at the end of the day the belief is that action will be taken if rate hikes are needed – they are already priced in, the market has already done most of the job. If it doesn’t turn out to be transitory as the Fed thinks, they can deal with it.
RYAN DETRICK, CHIEF MARKET STRATEGIST, LPL FINANCIAL, CHARLOTTE, NC
“The Fed didn’t rock the boat on this one. It was pretty well telegraphed what the Fed could do and they did what most people expected by announcing a $15 billion cut, while leaving zero percent (interest) rates.
“The tapering will begin later this month and end in July 2022, almost exactly what was most expected.
“Again, they didn’t throw any curveballs at market participants, and we don’t see massive volatility post-announcement as there were no real surprises. But we’ll see what happens when of the press conference.
“They left the word ‘transient’ in there. They hit the ball right in the middle. It’s business as usual. Jerome Powell telegraphed almost all of this before it happened.
KATHERINE JUDGE, SENIOR ECONOMIST, CIBC ECONOMICS, TORONTO
“The Fed kicked off the easing of accommodation today by announcing the start of the QE cut, as widely expected. The committee will cut the monthly pace of net asset purchases of Treasury securities by $10 billion and of $5 billion for agency mortgage-backed securities this month, implying a mid-2022 end of decline as officials have previously discussed, and opens the door to our forecast for two upsides rates in H2 2022.
“However, policymakers can alter the pace in response to a change in the economic outlook. This has been accompanied by a clarification of language regarding inflation, in which the elevated pace is still considered transitory, with the statement adding that supply and demand imbalances related to the reopening have contributed to higher prices of late, and they still expect to see a reduction in inflation as supply constraints ease.
THOMAS SIMONS, MONEY MARKET ECONOMIST, JEFFERIES, NEW YORK
“It’s pretty much over expectations, I would say. There’s a greater acknowledgment of inflation than we’ve seen before and the likelihood of that pressure continuing for at least a little longer, but it’s all presented in the context that it will end up being transitory in the end. They made sure to keep the word transitional, which is significant. If he was gone, that would suggest the Fed is taking a more hawkish stance, but that’s not the case. The cone has been pretty much heralded between minutes and recent speeches and so on. The pace of cuts of $10 billion a month was pretty much consensus…And the fact that they left the door open to increase the pace of purchases at some point, or they say adjust the pace of purchases, I only imagine that they would increase barring an exogenous shock to the economy by June. But if inflation continues to be an issue for them and their messaging, or if the job market is improving faster and they think takeoff is closer than they are now, they can still adjusting that and making sure the bond buying is done before anything really starts in the interest rate policy debate.
SCOTT PETRUSKA, CHIEF CURRENCY STRATEGIST, SILICON VALLEY BANK, BOSTON
“The market was extremely long in dollars and they still are. They have been accumulating dollar positions for quite some time. So, we’ve seen a bit of selling already – now that the facts are in, we can take some profit.
“Over the rest of the next quarter I still like the dollar, even though it has reversed its uptrend there are still a lot of things that drove the dollar that remain intact be it interest rates relatively high, and they’re going higher as we speak, with the Fed showing its eagerness to stop inflation and to some extent admitting that inflation may not be as transitory as it initially thought, and I still like it as a safe haven.
BRIAN JACOBSEN, SENIOR INVESTMENT STRATEGIST, MULTI-ASSET SOLUTIONS, ALLSPRING GLOBAL INVESTMENTS, MENOMONEE FALLS, WISCONSIN
“The Federal Open Market Committee (FOMC) announced that it would begin scaling back its asset purchases beginning in mid-November. It cut the pace by $15 billion a month, including $10 billion from its purchases of Treasuries and $5 billion from its purchases of mortgage-backed securities Monthly purchases from mid-November will be $70 billion in Treasuries and $35 billion in MBS From mid-December the pace will be $60 billion in Treasuries and $30 billion in MBS At this pace, the Fed should be done with its asset purchases by mid -June. The policy statement says the summer surge in COVID cases has created a slight lull in economic activity. The factors pushing inflation higher are expected to be transitory. This shows a slight lull in economic activity. flaw in their confidence that it is indeed transitory.The Fed is trying to change the word of the day from “transitional” to “flexible”. It has flexible average inflation targeting and its willingness to be flexible with its asset purchases and even when rates take off, depending on how long the permanent transition lasts.
JOSEPH LAVORGNA, CHIEF ECONOMIST AMERICAS, NATIXIS, NEW YORK
“I don’t think there’s anything unique about the statement other than the fact that they’re trying to buy time by saying inflation and supply chain disruptions are temporary, and that’s the main thing. What we got was exactly what was expected.
“They’re hedging their bets, but that’s nothing new, as we’ve heard publicly that they’re a little less confident things are going to come down as quickly on the inflation side as they thought. Along with the supply disruptions, things are dragging on a bit longer, and the statement reflects those realities.
TOM GARRETSON, SENIOR PORTFOLIO STRATEGIST, RBC WEALTH MANAGEMENT, MINNEAPOLIS
“More or less as expected, that means it will all depend on the press conference given a lot of nuance around what the markets are reassessing in terms of Fed expectations, the focus will be on the press conference. right now you start to see long term yields start to rise so with stocks doing well after the meeting it looks like even though it was largely as expected there is still a bit more of dovish inclination towards the lira early on the statement given that the only remaining question mark was how they would characterize inflation and they kind of nuanced it as they still expect transitory inflation. So maybe the risk of this meeting was that they are signaling more that inflationary pressures are starting to build up more than they are prepared to tolerate.
“It’s kind of offset because there are questions about the reduction in asset purchases starting this month or next month. So maybe the start of November is obviously a bit hawkish, it looks like they would like to start it and get it over with as soon as possible. But the qualifying factor here is that despite all the recent concerns about inflation, it seems they still not only expect it to is transitional, but they also added the qualifying statement that it is largely a matter of supply and demand factors in certain sectors of the economy.
OLIVER PURSCHE, SENIOR VICE PRESIDENT, ADVISOR, WEALTHSPIRE ADVISORS, NEW YORK:
“It seems very much in line with market expectations, and that is reflected in the muted reaction. It also leads me to think…we can probably expect one, maybe two rate hikes at the end of 2022, which is less than many had anticipated. But, generally speaking, no surprises, which is a good thing. One of the interesting things is that they have made it clear that many of these measures will be based on continued economic improvement and the outlook for inflation.
Compiled by the US Finance & Markets Breaking News team