16.12.2021 – A topsy-turvy world on the financial market: The Federal Reserve announces tighter tapering. As well as three interest rate hikes. And share prices are rising. The reason is likely to be Fed Chairman Jerome Powell’s double-speak: While the press release was quite hawkish, he was rather dovish in the press conference. Here, the focus was on the labor market, not on the fight against inflation. We attempt an analysis of the unfathomable oracle.
Three Possible Interest Rate Steps
That was the starting position before the big event yesterday: more than two interest rate steps in the coming year were considered hawkish by the analyst consensus. And lo and behold, the Fed indirectly announced three rate hikes for the coming year. Initially, there will be no change to the key interest rate of 0.0 to 0.25 percent. But in 2022, it could rise to 0.9 percent. In the September preview, the Fed had still assumed a level of 0.3 percent. An interest rate level of 1.6 percent is now forecast for 2023. That would be 0.6 percentage points higher than in the previous forecast.
Tighter Tapering
In addition, the U.S. Federal Reserve wants to wind down the massive securities purchases of the past few years twice as fast as recently expected. This could be over by the end of March. Until October, the Fed had still been collecting papers worth $120 billion a month. In November it was still 105 billion dollars. In December, it is expected to be $90 billion. From January, only 60 billion dollars. So far so bearish for stocks and co.
Powell wax soft
But Powell immediately softened the announcements. First, he explained that tapering is not tightening. What does that mean now? Then, at the press conference, he qualified this by saying that political flexibility must be shown before tapering – i.e. the throttling of the flood of money – is tightened. He also denied the need for immediate rate hikes – the conditions for which are far more stringent than tapering. And even inflation – which is still at 9.6 percent for producer prices in November – was talked down by the Fed chief: The Fed would have to analyze the issue of economic bottlenecks carefully before making a decision. Moreover, extremely long economic cycles are needed to keep unemployment low.
Focus on the job market
Peter Tchir of Academy Securities commented that tapering through March was more or less priced into the market. And, “The press conference seemed a bit stilted to me, but Powell did seem to straddle the line between fighting inflation and wanting growth. To me, and I’m biased, I found him addressing the nation rather than financial markets in a way he hasn’t done in the past. Maybe he is trying to appease D.C., while sticking to his guns? Plausible, and I’d appreciate that, but not sure that is how it played out. I think the most powerful thing he said was his view that you need very long growth cycles to really drive unemployment lower (with increased labor participation).” In summary, this means: Powell was apparently trying to quiet the Washington, D.C., power apparatus on the one hand. However, the hint that it would take a long time to lower unemployment had been the most important statement.
Our conclusion: The Fed has calmed investors’ nerves for the time being – if the focus is on economic growth, which may need government stimulus for quite a while, then tapering can’t be that bad. Especially since Powell has now put inflation back into perspective. Only recently, the Fed had admitted that inflation was not a transitional phenomenon.
So that’s why investors celebrated. It is quite possible that the Fed is talking the market down slowly in order to prevent a crash via shock therapy. So sometimes up, sometimes down. And another news for crypto disciples: Powell also said yesterday “cryptos are not a threat to financial stability”. The matter remains exciting, any statement from the Fed can turn the prices around again – Bernstein Bank keeps an eye on the matter for you.
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