Even though this Fed left it a decade too late to normalise monetary policy, it avoided a taper tantrum last week and seems to have found its mojo, for now.

Last week, the Fed steered global monetary policy as carefully as if it was towing the world’s biggest party boat through Venice’s Grand Canal.

What it did was double down on the taper (i.e., stop purchasing new paper at double the earlier rate to get rid of new bond purchasing by end of March) and talk a little about the interest rate lift-off, with three to four rate hikes in 2022.

You would have thought that the market would have regurgitated its breakfast.

And it would have, had it not been for two things.

First, the market had prior warning of Fed Chair Powell’s likely intentions to stem supply side inflation by accelerating the taper.

Second and more importantly, Powell told the market the taper was not on auto pilot and that the Fed stands ready to reverse its stance and be more accommodative if economic data warrants. He also indicated no balance sheet run-off for the time being.

Here’s the full transcript from last week’s meeting.

Noted on page 2:

“The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook. The Federal Reserve’s ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.”

Well done, even though it’s still a Clayton’s taper.

But on the subject of rate hikes as we enter the holiday period, the picture really isn’t that clear.

On one hand, 5 and and 10 treasury yields are currently ranging from 1.18% to 1.41%, which is hardly alarmist. In other words, market yields are not indicating that anyone’s too worried about runaway interest rates, and that a few rate hikes in 2022 are already factored in.

On the other hand, it’s reasonable to expect that if by February inflation looks a lot more persistent (aka Omicron, lockdowns, price rises) and households start to falter in their daily needs, Democrats will expect rate hikes to be brought forward to stem consumer prices pain on main street.

Will the Fed be able to achieve this?

Not sure, but it’s a key question for markets because with rate rises also come increased debt servicing costs.

Still, more volatility usually means more opportunity for businesses (and investors) that are well positioned. Chin up!

See you in the market.

Mike

A shipworthy Fed for now