The Fed summed up the results of the regular meeting. The Bank will accelerate the reduction of incentives and, probably, will start raising the rate in the first half of 2022.
The rate will be raised, but not now
The regulator will accelerate the reduction of monthly purchases of bonds. So, in December, purchases will amount to $ 90 billion, in January — 60 billion. If the Fed does not further change its policy, in February, purchases will decrease by another 30 billion, and in March the mitigation program will end.
After that, in the first half of 2022, the central bank may start raising interest rates, which is still near zero. At the meeting, the commission voted to raise the rate in 2022 to 0,9%, in 2023 — until 1,6%. Recently, in September, the regulator planned to raise the rate in 2022 only up to 0,3%, and in June I even wanted to leave it near zero.
How rate forecasts have changed in 2022
| March | 0,1% |
| June | 0,1% |
| September | 0,3% |
| December | 0,9% |
0,1%
Inflation is no longer temporary
The Fed is forced to cut stimulus and move to a rate hike due to high inflation, which in November was 6,8%. This is a record for the last 40 years level. So, compared to last year, food prices increased by 6,1%, on new cars — on 11,1%, on used cars — on 31,4%, for gasoline — for 58%.
This rise in prices was driven by increased consumer demand, lack of supply, caused by disruptions in the supply chain, and other factors. Since the beginning of the year FED Jerome Powell called inflation temporary, but only in December recognized, that it is not.
According to the commission, inflation in 2021 will be 5,3%, in 2022 — 2,6%. Since March, these estimates have changed a lot., after all, then the commission expected price increases by the end of 2021 only by 2,4%.
How inflation forecasts have changed in 2021
| March | 2,4% |
| June | 3,4% |
| September | 4,2% |
| December | 5,3% |
2,4%
What about stocks
The market reacted positively to the decision of the regulator. Grew more than the rest Nasdaq, which includes rate-sensitive tech companies, - on 2,2%. S indices&P 500 and Dow Jones added 1,6 And 1,1%.
One of the reasons for this growth is the lack of uncertainty, which was before the meeting. The Fed finally acknowledged the problem in the form of high inflation, but did not take radical decisions. Probably, the markets could fall strongly in only one case: if the bank raised the rate now.
The next meeting will be held in March, when he finishes buying bonds. And if inflation doesn't go into double digits, it is possible, that the Fed will delay the rate hike until the meeting in June.
A lot can happen in these six months.. For example, more dangerous strains of COVID-19 may appear and the economy will be quarantined again. In such a situation, the Fed will not dare to tighten policy and again postpone the decision on the rate. This probability encourages investors to continue to invest in stocks..
And what's the bet here??
The bank's loose monetary policy is one of the main drivers of stock market growth. In March last year, countries were quarantined, a S&P 500 fell by 30%. Then the Fed lowered the rate to the level of 0-0.25% and announced a quantitative easing program.. The stock market began to grow and doubled by August 2021.
The yield of safe instruments like deposits and bonds fell with the rate. To make a profit, investors transferred savings to stock market, which led to the growth of shares. Even near-zero rates allow companies to take loans at low interest rates. It becomes easier for them to finance their growth and increase profits.
But with the growth of rates, it will be more difficult for indebted companies to repay the debt. Yields on deposits and bonds will also rise, and the risk premium for holding expensive stocks will fall. Here's Why Investors Are Watching The Fed's Decisions So Closely.
