The Fed meeting was no longer about whether or not they will begin the tapering; it was more about the timetable – the ‘when’ and ‘how’. But there was no time-table; the Federal Reserve kept rates unchanged, as expected, and indicated that tapering of asset purchases "may soon be warranted," without providing specific details on timing and pace.
Powell had promised that the Fed would give enough of an advanced notice of any taper and this policy was just that – an alert. But with the Chinese crisis brewing over and Covid wrecking havoc across USA, looks like the Fed decided to wait till its meet in November to give out a timetable, not wanting to rock an already rocky boat in stormy waters.
But what it did say is that the tapering is right at the doorstep, as early as 2-3rd Nov but more significantly, the Fed said that it might start raising interest. No surprises here but to hear the Fed say what was earlier just “expectation” is sure to send jitters down the market’s spine. A rate hike talk, along with a tapering is sure to keep the markets worried today.
In the projections updated by the Fed, it also penciled three interest rate hikes in 2023 and three more in 2024, bringing the benchmark interest rate up to 1.8% by the end of the period. But half of the FOMC members penciled in a rate hike as early as 2022, while the other half is looking at 2023.
The Fed has been purchasing at least $120 billion a month in Treasury and mortgage bonds since June 2020 to provide additional stimulus.
The two indicators given to start this process of taper are inflation and employment of which inflation targets have been met employment is not yet there – thus it would be safe to say that the Fed will wait for one more month of employment numbers, in Oct and then in November we could see a more concrete roadmap. And more significant than the taper, is the Fed’s view on the interest rate as the reversal of the rate cycle is what could impact the free flow of funds into the market.
But this does not mean we are going to see a sustained correction on the bourses; action from the Fed is still a few months away, both on tapering as well as rate hike. Thus any fall should be used as an opportunity to buy into strong stocks.