Fed Chairman Powell stated today that the crisis-driven asset purchases (taper) will end next year, setting the stage for interest-rate hikes during 2022 in an attempt to contain persistent high inflation. The Fed projections suggest at least three (3) quarter-point rate hikes are likely during 2022 and another three (3) further rate hikes during 2023, pushing the benchmark overnight lending rate to around 1.5-1.75%, as compared to the current 0-0.25% target range.
The outlook implies the Fed will begin the hiking process soon after mid-March 2022 or after the end of the tapering program. The Fed can start the first 0.25% hike in June 2022 and follow that with another two quarter-point hikes through the remainder of 2022. In 2023 the intention is for three more hikes.
Earlier today, stock prices were lower as investors waited patiently for the conclusion of the Fed FOMC meeting. Soon after the Fed announcement, the stock market turned higher. The immediate interpretation from investors to the news is that this is a dovish taper as the Fed will focus on inflation but will also not tighten too quickly to derail the economic recovery. Some call this economy a Goldilocks environment – not too hot or cold.
The Fed does not want to upset the market but is increasingly concerned about persistent inflation. The decision to keep rates near zero and reduce the taper program by $30 billion per month is a compromise.
The market actions are technically constructive, as markets near last week’s highs, while others have recorded bullish positive outside days.
So, the question remains - is this the start of the Santa Claus year-end rally?
The technical levels to clear or hold above to confirm the rally are as follows:
S&P 500 Index (SPX – 4,709.85) – No positive outside day today. Above 4,713.57-4,718.50 (11/5 and 12/10/21 highs) and preferably above 4,743.83 (11/22/21 all-time high) confirms the year-end rally.
Dow Jones Industrial Average (INDU – 35,927.43) – Positive outside day. Above 35,982.69 (12/10/21 high) and preferably above 36,565.73 (11/8/21 all-time high) ignite the next sustainable rally.
New York Composite Index (NYA – 16,813.57) – Positive outside day. Above 16,923.74-16,944.48 (12/8 and 9/2/21 highs) and preferably above 17,364.31 (11/16/21 all-time high).
Nasdaq Composite Index (COMPQ – 15,565.58) – Positive outside day. Above 15,796.05-15,833.11 (11/29 and 12/9/21 highs),and preferably above 16,053.39-16,212.23 (11/5 and 11/22/21 all-time highs).
Nasdaq 100 Index (NDX – 16,289.59) – No positive outside day. Above 16,413.28-16,454.56 (11/5, 11/30, and 12/9/21 highs) and preferably above 16,764.86 (11/22/21 all-time highs).
S&P 400 Mid Cap Index (MID – 2,766.65) – Positive outside day. Above 2,810.54-2,849.09 (11/26/21 gap-down and 10/25 and 12/7/21 highs), and preferably above 2,925.93 (11/8/21 all-time high).
S&P 600 Small Cap Index (SML – 1,363.13) – Positive outside day. Above 1,407.12-1,420.00 (11/26/21 gap-down and the 6/8 and 12/7/21 highs) and preferably above 1,427.45 (11/8/21 all-time high).
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