FOMC meeting review: Six key takeaways from the latest meeting

For the most part, the Fed delivered what was expected of them on policy at its latest meeting, but it was the guidance and commentary that really stoked risk appetite.

Here are a few of the main takeaways from the FOMC.

Tapering will begin this month

As expected, the Fed will begin the process of tapering its balance sheet, starting in the middle of this month. The taper will be at a US $15 billion per month clip, comprising US $10 billion worth of Treasuries, and US $5 billion mortgage backed securities. The Fed implied this will see the process of tapering end by mid next year. But the central bank also stated the tapering isn’t on a fixed path and can be adjusted to accommodate for changing economic circumstances.

Powell pushes back on future rate hikes

While markets were worried about the prospect of rate hikes being guided sooner than had been done previously, US Fed Chair Powell pushed back on the notion an end to tapering necessitated an immediate commencement of interest rate hikes. He said the central bank can be “patient” when it comes to interest rates, and that “no direct signal” should be derived about the path for rates from the bond buying program.

Inflation more persistent, but will ease in 2022

Inflation risks underpinned much of the Fed’s logic on policy and its outlook, with the central bank suggesting “substantial further progress” had been made on price growth. Chair Powell watered down fears of a faster hiking cycle because of persistent inflation, suggesting that supply-side disruptions would subside, and the risk of a wage-price spiral was low, as the labour market returns to equilibrium following the pandemic. Powell was certainly less blasé about inflation going forward, it must be said, changing his stance that it was simply “transitory”, to one that was driven by “transitory factors”. By his latest estimations, inflationary pressures ought to ease by the second or third quarter next year.

There remains slack in the US labour market

The jobs market was less of a feature of the Fed’s commentary, but still remained central to its policy considerations. Chair Powell stated that “there’s still ground to reach” on maximum employment, but suggested that could be achieved by next year, implicitly dismissing fears that the jobs market may already be close to full employment on the basis that labour shortages ought to subside as the jobs market normalizes following the pandemic.

Markets turn bullish in response to decision

The markets reacted to the decision overnight with an emphatic “risk-on” move. The VIX retested the 14-level, just before closing slight above 15, while stocks surged across the board, with the US 500, Wall Street, US Tech 100 and US Russell 2000 all hitting record highs for a second straight day, led by a rally in consumer stocks. The US Dollar also broadly declined, boosting riskier currencies like the AUD/USD. US yields rose across the board, but reassuringly, the curve bear steepened, as traders became slightly anxious about rate hikes, with benchmark 10-year yield finishing five basis points higher and at 1.6%. Gold prices also plunged around 1%.

Rate markets still imply a mid-2022 lift-off

For all the relief, so clearly evident in financial markets last night, there does remain some wariness about Fed policy, and whether it has the control over inflation and future rate hikes that it states. Real yields dropped as inflation expectations in the market remain relatively high, while market pricing is still implying that, on the balance of probabilities, the Fed will begin its next hiking cycle in the middle of next year.