The United States Federal Reserve starts its last monetary policy meeting of the year on Tuesday. In a script change already anticipated by its president, Jerome Powell, the Federal Open Markets Committee (FOMC) will close 2021 by accelerating the withdrawal of stimuli in the face of pressing inflation. At the end of the delegation, those responsible for maintaining price stability and ensuring full employment are expected to double the pace in reducing asset purchases, a process known as tapering.
In early November, the FOMC announced and initiated a $ 15 billion a month cut ($ 10 billion in Treasuries and $ 5 billion in mortgage-backed assets) to be implemented through the current month.
In this way, the Fed left the door open to alter the pace of its withdrawal based on the evolution of price pressures. Last week we learned how the CPI on this side of the Atlantic accumulated in November a year-on-year rise of 6.8% while its underlying rate already rises by 4.9%, surpassing the central bank’s average goal of 2% and reaching highs in almost 40 years.
The Fed brought rates to a range of 0 to 0.25% and began a monthly purchase of $ 120 billion in assets ($ 80 billion in Treasuries and $ 40 billion in mortgage assets) in March 2020 in response. to the pandemic. Since then its balance has more than doubled to $ 8.6 trillion.
Accelerating the cut in purchases to $ 30 billion a month will allow the Fed to end tapering in March. This would give a margin to evaluate the economic performance and determine if inflation will peak in the first quarter before raising rates.
The consensus expects a first rise of 25 basis points for the month of June and discounts another two more throughout 2022. The meeting, which will end on Wednesday, will be accompanied by an update of the macroeconomic forecasts and a diagram of points, where officials project where they see the price of money in the short and medium term.
Michael Hartnett, chief strategist at Bank of America Securities, elaborates in his latest report a brief analysis of how Wall Street has reacted when the US central bank has become “more aggressive.” To do this, take a look at 5 episodes (1969, 1979/1980, 1994 and 2018) in which the Fed stepped on the accelerator when it came to tightening monetary policy through rate hikes. According to estimates, the total return of a portfolio of stocks and debt (50-50) was -8.3%, -4.6%, 14.9%, -2.3% and -4.6%, respectively. .
Hartnett highlights some asset market observations in years when the Fed has been more aggressive in its policy. As he points out, the yield curve typically flattens, growth stocks outperforming value stocks. By sectors, pharmaceuticals and technology companies are the ones that benefit the most and telecoms the most affected.
Wall Street already anticipates the first rate hike to next June
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