I am sure, as you all are very aware, last Friday was not a good day for the positive outlook of the Economy, bad enough to cause an emergency Federal Reserve meeting.
Arguably, one of the biggest meetings of the year takes place tomorrow and will go well into the following day, Wednesday. Tomorrow morning, the Federal Reserve will commence their emergency meeting to discuss what exactly needs to be done to get this “transitory” inflation back under control. As the meeting begins, markets may move, but the true movement will come after the meeting concludes and possibly well into the next couple of weeks or months. For good or bad? Nobody knows just yet.
Here is What Investors Need to Watch Out For.
Could There Be a Dovish Taper?
Highly Unlikely. The talk of the town has been all about the Federal Reserve looking to double taper and speed up the conclusion of their asset purchase program, not reduce or slow it down. The Fed is expected to reduce their bond and MBS purchases by $30 Billion a month, up double from their previous target of $15 Billion. Steve Englander, head of North American macro strategy at Standard Chartered Bank suggests that an increase to $25 Billion would be most beneficial and would gain the most support, which he classifies as “dovish” compared to the expected $30 Billion, but is nowhere near “dovish” in terms of the whole process.
Retirement of J. Powell's Favorite Word: “Transitory.”
It is about time this word got put out of commission. 6.8% CPI YoY does not seem so “transitory,” Jerome. Powell has signaled to the retirement of this word before but has yet to take full action. The question: what word will replace “Transitory?” Some analysts give their opinion. Neil Dutta, head of Renaissance Macroeconomics, suggests that the Fed will use the word “elevated.” Ricchiuto, Managing Director and Chief Economist of Mizuho Securities USA, suggests “a one time permanent adjustment in prices.” Barclays Economist, Michael Gapen suggests “persistent.” None of which are even close to “Transitory.”
How Many Rate Hikes Will Occur?
The Federal Reserve's Dot-Plot proposes a total of six rate hikes by the end of 2024 looking to achieve a terminal rate of 1.8%. Some BI analysts suggest three or four hikes per year until well into 2024 looking to achieve a terminal rate of 2.5%. Other analysts have spoken out expecting upwards of nine rate hikes in the same time frame.
Will There Be A Change in Forward Guidance for Rate Hikes?
Ricchiuto says no, it is too soon. Recently, the Fed said they plan to keep rates close to zero until the labor market has reached full employment and the economy can safely handle it.
What Is The Forecast For Next Year?
Markets will move based on what type of forecast the Fed lays out for the coming year. As we have seen, predictions are all over the place but the Federal Reserve is no basic analyst, what they say goes. According to Ricchiuto, the Fed expects to see the economy expand at a 3.8% rate, BUT this could be revised lower over the coming days. Inflation is forecasted to drop to 2.2%...finally. Unemployment should stay right around 3.8%. Rucchiuto speaks again, saying a vast majority of the Fed’s revisions for 2022 will be crucial to market discounts in the new year.
The upcoming meeting is going to play a key role in positive (or negative), but hopefully positive future economic outlooks for the year ahead. Future market price action is heavily dependent upon what the Federal Reserve says/decides in the meetings over the next two days. Keep your eyes peeled.